[Debt Dilemma] ② Reducing Household and National Debt While Stimulating the Economy?…Government and Bank of Korea's 'Dilemma'

"The fiscal management policy of our government is sound finance." (President Yoon Seok-yeol, October 31 National Assembly policy speech)

"Household debt is a subject that must be well managed." (Kim Dae-gi, Chief Presidential Secretary, October 29 High-level ruling party-government meeting)

The government has rolled up its sleeves to tackle the chronic problem of 'debt reduction' in the Korean economy. President Yoon Seok-yeol reiterated the importance of sound finance in his National Assembly policy speech and announced plans to restructure government spending, while Kim Dae-gi, Chief Presidential Secretary, recently emphasized active management, warning that "if the household debt problem explodes, it will have several tens of times the impact of the foreign exchange crisis." This shows the government's determination to simultaneously catch the two rabbits of household debt and national debt.

However, since debt reduction inevitably accompanies contraction in consumption, investment, and the economy, voices from the market and academia call for a careful approach. Especially as the Korean economy's recent growth rate has sharply fallen to 1-2%, debt reduction could further depress domestic demand, employment, and growth. Experts explain that for the government's debt reduction efforts not to remain mere political slogans, mid- to long-term macroeconomic policies considering growth and distribution must be prepared.

Household Debt Instead of Government Debt... A Different Growth Model from the US and Japan

According to the Bank for International Settlements (BIS) as of the first quarter of this year, Korea's household debt-to-GDP ratio stands at 101.5%, while the national debt ratio is 47.3%. Compared to major advanced countries such as the US and Japan, Korea's household debt ratio is very high, whereas its national debt ratio is relatively low. The US has a household debt ratio of 73.6% and a national debt ratio of 103.6%, while Japan's household debt ratio is 68.1% and national debt ratio is 231.8%. The average for advanced countries is 73.4% and 104.9%, respectively, with national debt ratios being higher.

Thomas Helbling, IMF Asia-Pacific Deputy Director, also stated at a recent Asia-Pacific economic outlook press conference, "Korea's current national debt level is appropriate," but regarding household debt, he said, "It is high even among the top group of OECD countries, so policy formulation is necessary." This can be interpreted to mean that the Korean government has mainly relied on household debt rather than government debt as a growth model.

However, the government places more emphasis on strengthening fiscal soundness than on household debt. Early last year, the Presidential Transition Committee announced plans to restructure spending due to growing concerns over fiscal soundness caused by the previous government's expansionary fiscal policy. In fact, the Ministry of Economy and Finance prepared next year's budget at 639 trillion won, applying the lowest growth rate (2.8%) since 2005, cutting budgets for research and development (R&D) and other areas significantly.

Considering the high likelihood that national finances will increase further due to aging and low birth rates, debt management to secure fiscal soundness is necessary, but the problem is that other sectors supporting growth, such as household consumption, investment, and exports, are also not in good shape. According to the Bank of Korea, exports have decreased year-on-year for 12 consecutive months through August this year, and private consumption, another pillar of growth, has shown sluggish performance since last year due to high interest rates.

Reducing Debt While Maintaining Growth... China Also 'Failed'

China, which has maintained growth over the past decades through real estate-related debt, faces a similar situation. When local government and corporate debt ratios rose sharply due to excessive construction and infrastructure investment, China introduced a debt reduction policy in 2016. However, as growth rates declined, it reversed course by loosening fiscal policy. Recently, President Xi Jinping announced plans to issue 1 trillion yuan (about 184 trillion won) in government bonds, partially easing the tightening stance after default risks emerged among major real estate developers such as Evergrande and Biguiyuan, and deflation concerns arose.

This indicates how difficult it is to simultaneously manage debt and stimulate the economy. Although our government avoids a 'small government' approach, pursues tax cuts, and does not issue government bonds, when tax revenues fall short, the Bank of Korea temporarily increased its borrowing to 113 trillion won and decided to draw 20 trillion won from the Foreign Exchange Stabilization Fund used for exchange rate defense. Although these figures are not recorded as national debt, criticism arises that this is merely "turning a blind eye" since the state ultimately has to repay the money.

Therefore, some in academia call for more flexible fiscal policies. Professor Ha Jun-kyung of Hanyang University's Department of Economics explained, "The government can usually endure debt for a relatively long time, so deleveraging typically occurs in the order of households, corporations, and then government. However, in Korea, the government is deleveraging first while household debt continues to increase, which is unusual."

Securing 'Growth Momentum' Through Flexible Government Policies

Professor Son Jong-chil of Hankuk University of Foreign Studies also said, "Although Korea increased government spending during the pandemic, it was not as much as other countries," adding, "At the current level, Korea has some room to increase national debt relative to GDP." He explained, "Spending on areas such as R&D, welfare for retiring baby boomers, and job retraining could serve as a stepping stone to boost future economic growth."

In fact, academia widely agrees that efforts to expand potential growth rates should take priority over the ratios of household and government debt themselves. Amir Sufi, a world-renowned scholar in household debt at the University of Chicago, wrote in a paper submitted to the National Bureau of Economic Research (NBER) in July, "If potential growth rates decline, the possibility of deleveraging through high growth diminishes, worsening the economy's debt dynamics," warning that "this could make policy trade-offs more difficult."

Of course, in the US, massive fiscal spending has maintained relatively high growth rates, but the fiscal deficit structure has worsened, causing government bond interest rates to rise and credit ratings to fall, so a careful approach is necessary. Recently, in politics, the ruling party insists on maintaining a sound fiscal policy, while the opposition argues for increasing government spending to enhance welfare and growth, indicating the need for a compromise.

Professor Park Sang-in of Seoul National University's Graduate School of Public Administration said, "Because inflationary pressures are high, the opposition's argument to stimulate the economy through large fiscal deficits is not correct, but the government's direction to secure fiscal soundness by cutting taxes is also inconsistent," adding, "Fundamentally, to maintain long-term growth, policies are needed to properly manage debt issues while overcoming the manufacturing crisis through industrial structure transformation that has reached its limits."

This content was produced with the assistance of AI translation services.