The Korea Herald


[Editorial] Pass fiscal rule

Sovereign debt exceeds 1,000 trillion won; parties stuck on populism ahead of elections

By Korea Herald

Published : April 7, 2023 - 05:30

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Managing national debt counts for a lot. If a nation manages it poorly, its people pay a terrible price.

If sovereign debt exceeds an optimum range, the country’s credit ratings could fall and foreign capital could flee. Worse, the nation could default on its debt. Many people's living standards would fall dramatically, as they did during the Greek and Latin American debt crises.

The statement of government accounts for the fiscal year of 2022, which was approved in a recent Cabinet meeting, causes such concerns.

Debt held by central and local governments such as government bonds and loans surged to over 1,067 trillion won ($808 billion) last year.

It accounted for 49.6 percent of the country’s gross domestic product. The amount and the ratio both were record highs.

The per capita government debt rose past 20 million won for the first time to 20.68 million won.

Tax collection increased by nearly 50 trillion won, but the managed fiscal balance -- a key gauge of the government’s substantive financial status -- ran the largest ever deficit of 117 trillion won. The figure was largely affected by about 80 trillion won expenditures made through two revised supplementary budgets last year.

The country’s broad-sense liabilities, which include estimated or potential liabilities such as provisions against government employee pension in addition to government debt, swelled to 2,326 trillion won last year. This is an increase of 130 trillion won in a year.

Now national liabilities seem to be getting out of control.

The more serious problem is the speed of their increase. They surged 62.3 percent in five years from 1,433 trillion won in late 2016, less than five months before the Moon Jae-in administration was inaugurated.

With debt snowballing quickly to a staggering level, government finance has become shaky. It has become urgent to reduce the deficit.

But a bill on fiscal rules to limit annual deficit size has gathered dust for seven months in the National Assembly.

The Yoon Suk Yeol administration proposed a revision bill to the government finance law in September last year. The bill calls for the government to maintain the managed fiscal deficit within 3 percent of the gross domestic product and curtail it to within 2 percent of GDP if the government debt-to-GDP ratio goes over 60 percent.

To make matters worse, national tax collected in January and February decreased by 15.7 trillion won from the same period of last year. It is the largest ever decline for the two-month span. Economic recession and a real estate market slump are cited as major causes of the decrease in tax revenue. The government expects both factors to improve in the second half, but no signs of improvement are in sight yet.

After all, there is no option but to cut down on spending in order to secure fiscal soundness. However, politicians pay no heed. Rather, they move in the opposite direction, never ceasing in populist legislation. The majority opposition Democratic Party of Korea seeks to expand basic pension to every senior aged 65 and older. This would cost more than 10 trillion won in taxes. The party is also working on a bill to set aside about 5 trillion won each year to fill in the losses of the national health insurance. The losses were incurred largely due to the previous administration’s measure to enlarge insurance coverage in the name of “Moon Jae-in Care.”

As the general elections next April are approaching, the government and the ruling party will be increasingly tempted to curry favor with voters. The ruling party is said to be considering a wide array of measures to win over young generations, whose support for the party is dwindling.

The need for a revised supplementary budget is occasionally mentioned within the ruling and opposition parties. If they consider the future of the country a bit, they must stop seeking populist bills that could worsen the government’s financial status. They ought to pass the code for fiscal rules as early as possible.