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Light and shade of debt

Fiscal operation holds key for success of ‘J-nomics’

Whenever President Moon Jae-in unveils a major welfare program, political opponents accuse him of being anxious to drain state coffers.

Attending the National Assembly’s Special Committee on Budget and Accounts Tuesday, Finance Minister Kim Dong-yeon attempted to assure these fiscal hawks. “Don’t worry,” Kim said. “The government debt will not exceed 700 trillion won ($620 billion) at the end of this year.”

Even without the top financial policymaker’s assurances, Korea’s national debt is anything but worrisome. As of the last year end, the government debt ― as measured by the “D2” yardstick (composed of debt securities, loans, SDRs, currency and deposits) ― stood at 676.2 trillion won, or 43.2 percent of the GDP, barely a third of the OECD average of 112.2 percent.

As if by coincidence, however, the National Assembly Budget Office released a report later in the day that illustrated reasons the incumbent administration’s self-complacency can be risky.

“Based on income level and demographic structure, our government debt can hardly be called low,” it said.

In 2014, when Korea’s per capita GDP reached $27,000, for example, the government debt-to-GDP ratio was 35.9 percent, not much lower than that of Germany (45.5 percent), the United Kingdom (52.3 percent), Japan (61.6 percent) and France (66.6 percent) when these countries’ per capita incomes hit the same target, it pointed out.

Also, Korea’s debt-to-GDP ratio is estimated to be 40.9 percent next year when the nation becomes an “aged society.” This is even higher than the comparable numbers of 32.6 percent for France in 1979 and 36.8 percent for Germany in 1991.

“Add to these Korea’s fast debt-growing tempo of 11.5 percent from 2000 to 2015, compared with the average 7.5 percent of 32 OECD countries, and the nation will have to take its fiscal health seriously,” a critic said.

All these hard figures are difficult to refute. Nor should there be any need to deny the importance of fiscal sustainability in the long run.

What these conservative oppositionists left unsaid is why Korea has come to need an expansionary fiscal policy. A far bigger threat is the nation’s household debt, which is nearly double the government debt, due mostly to the two previous administrations’ failed economic policies ― maintaining a big-business friendly policy that has never trickled down and encouraging working-class families to buy homes with bank lending benefiting only large builders.

Major international organizations, such as the OECD, the International Monetary Fund (IMF) and the World Bank, are advising governments with “fiscal space” ― like Korea ― to make the most of it for stimulus rather than hurting the economy with unnecessary ― and rather harmful ― deleveraging.

We hope, and believe, Moon and his economic team will find the optimal balance between fiscal and economic health.


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