Back To Top

[Editorial] Sensible policy needed

Mounting debt, deteriorating growth potential holding back Korea’s economy

The ruling Democratic Party of Korea won a landslide victory in last year’s parliamentary elections after it blanketed negative voter sentiment with a pledge to provide coronavirus relief cash handouts to all households. After the electoral win, President Moon Jae-in’s government doled out 14.3 trillion won ($12.1 billion) in relief grants to more than 21 million households across the country.

Lee Jae-myung, the liberal ruling party’s candidate for the presidential election in March, apparently remembered the effect of the virtual vote-buying tactic last week when he called for another round of cash handouts for everyone.

He insisted the government dole out an additional 300,000-500,000 won per person, saying it is expected to log a larger-than-expected surplus in tax revenue this year.

Prime Minister Kim Boo-kyum responded negatively to Lee’s proposal, which is estimated to cost more than 15 trillion won. He said the government could not afford another round of universal COVID-19 relief grants, emphasizing that the most urgent task for now is to compensate the self-employed and small-business owners -- those suffering the most from the fallout of the pandemic.

Lee seemed to be barely bothered by the prime minister’s objection to his proposal. Later in the week, he reiterated that the country had the financial resources for additional relief grants due to a tax revenue surplus. That surplus, he said, “comes from people’s pain, so it should be used to alleviate their suffering.”

What he ought to keep in mind is the outcome of an opinion poll conducted over the weekend on the need for additional relief cash handouts. In the poll of 1,009 people aged 18 and above, more than 60 percent of respondents said they were against the idea because it could cause an excessive fiscal burden. Only 32.8 percent were in favor of it.

The results of the poll suggest growing public concerns about the deterioration of fiscal conditions under Moon’s presidency.

South Korea’s national debt is projected to increase by a whopping 408 trillion won during Moon’s five-year tenure to exceed 1,000 trillion won for the first time in 2022, when he leaves office. As a result, the country’s ratio of national debt to its gross domestic product is forecast to rise from 36 percent to 50 percent over the cited period.

A recent report by the National Assembly Budget Office warned that, if allowed to grow at the current pace, the national debt would balloon to 1,400 trillion won in 2025 and 2,200 trillion won in 2030.

What is more worrisome is that the steep debt increase is set to be coupled with declining growth potential, which reflects the deepening structural problems weighing on the economy.

A Bank of Korea report released in September showed that the nation’s potential growth rate, which refers to the maximum rate at which an economy can grow without triggering inflation, declined from 3.1-3.2 percent for 2011-15 to 2.5-2.7 percent for 2016-20 and 2 percent for 2021-22.

A separate report published last month by the Korea Economic Research Institute, a private think tank, projected the figure would fall below 1 percent in the coming decade.

Reports released this week by two major international economic organizations should also be seen as ringing alarm bells for the weakening growth potential of Asia’s fourth-largest economy amid its worsening fiscal conditions.

According to a report from the Organization for Economic Cooperation and Development, Korea’s potential real GDP per capita growth rate for 2030-2060 is estimated to be 0.8 percent on average annually, the lowest among its 38 member states.

The International Monetary Fund predicted in its report that Korea’s national debt-to-GDP ratio would rise 15.4 percentage points over the next five years to 66.7 percent in 2026. That is the fastest pace among the 35 nations the Washington-based organization classifies as advanced economies.

The Moon administration has pursued what are criticized as a string of misplaced policies that have undermined the country’s growth potential and fiscal soundness.

It might well be that the issues of how to bolster growth and manage fiscal expansion will loom larger than ever in the upcoming presidential contest, which pits Lee against the conservative main opposition People Power Party’s Yoon Seok-youl.

By Korea Herald (