[The Editors' Verdict] Government Debt Is More Serious Than Expected

About a year has passed since the outbreak of COVID-19. Over the past year, the impact of COVID-19 has affected all sectors including the economy, society, and culture, and since the resurgence in the second half of last year, various changes have occurred in lifestyle patterns. During this time, governments around the world have implemented various fiscal and monetary policies to reduce the economic damage caused by COVID-19. Domestically, up to the fourth supplementary budget has been enacted, and since the resurgence last year, disaster relief funds have been provided almost every month. So, is there no problem with funding? Naturally, the national fiscal condition becomes serious. Basically, since South Korea's currency is not a key currency, if the fiscal condition rapidly deteriorates, foreigners holding government assets are more likely to sell them, which also affects the trading of government bonds.

The Bank for International Settlements (BIS) publishes non-financial sector credit data up to the second quarter of 2020. Although the totals may not exactly match domestic statistics, it is easier to compare with other countries. Since this is data from the second quarter of last year, the first supplementary budget of 14.3 trillion won is likely included. In this data, the average total debt to GDP ratio of 43 countries is 265.6%. South Korea's ratio is 252.0%, close to the average, ranking 22nd. However, looking at the increase or decrease since 2017, South Korea ranks 8th after Singapore, France, Canada, Chile, Argentina, Japan, and the United States, indicating a fairly rapid increase in debt.

As of the second quarter of 2020, South Korea's government debt to GDP ratio was 45.2%, which was quite favorable. This excludes public sector debt and financial public enterprise debt. Based on the second quarter of 2020, South Korea ranks 22nd with 45.2%, placing it in the middle range, but its increase ranks 14th. According to domestic statistics, as of the end of 2019, general government debt (D2) was 42.2%, and when including public sector debt (D3), which covers non-financial public enterprises such as Korea Electric Power Corporation and Korea Land & Housing Corporation, and financial public enterprise debt (such as Korea Development Bank, Korea Housing Finance Corporation, and guarantee institutions), the ratio is expected to be considerably higher. Public sector debt (D3) was 59.0% at the end of 2019, showing an increase effect of about 16.8%. Additionally, since aging is progressing, pension and welfare expenditures related to aging must be considered. In fact, in 2018, when the population aged 65 and over reached 14% or more, entering an aged society, the D2 ratio was 40.0%, which was favorable, but the increase in the debt ratio is relatively rapid.

Household debt and corporate debt are much more serious. As of the second quarter of 2020, the household debt to GDP ratio ranked 7th, and its increase since 2017 ranked 3rd. Household debt growth is high, following Hong Kong and China. The corporate debt to GDP ratio in the second quarter of last year ranked 17th, and its increase since 2017 ranked 7th. It increased significantly after Chile, France, Singapore, Sweden, Switzerland, and Japan. The government has already introduced policies to curb household debt.

Fiscal capacity refers to the gap between the upper limit of national debt that a country can bear at the current point and the current national debt. Although tax revenues can increase with tax rate hikes, excessive tax rate increases may reduce tax revenues due to contraction in consumption and investment, thus there is an upper limit to tax revenues. The IMF estimated in 2010 that the limit was 203% of domestic GDP, and Moody's estimated 241% of GDP in 2014. Some studies consider 145% based on D3, which includes public sector debt, as the limit for national debt ratio. Even considering some time has passed and growth rates, the current debt status is not low, and when including financial public enterprises and aging in D3, the situation is not favorable. Household and corporate debts are already under government management, and the time to address government debt is approaching.

Professor Kim Sang-bong, Department of Economics, Hansung University