Bloomberg: "South Korea's Government Debt to Surpass GDP Size in 20 Years"

There is a forecast that South Korea's government debt could exceed the size of its Gross Domestic Product (GDP) in about 20 years.

On the 19th, Kwon Hyo-sung, an economist at Bloomberg Intelligence (BI), a research institution under Bloomberg, stated in a fiscal outlook report that "the government debt-to-GDP ratio, currently at 57%, is expected to reach 70% by 2030, 100% around 2045, and 120% by 2050." Government debt includes national debt (government bonds, borrowings, and government debt burden acts) as well as debts of non-profit public institutions.

Last year, South Korea's government debt-to-GDP ratio was 55.2%, lower than that of the Group of Seven (G7) major countries such as Japan (252.4%), the United States (122.1%), and Germany (64.3%). However, the report predicted that an unmanageable government debt problem will arise due to population aging and low birth rates. It pointed out that while the labor force will decrease and tax revenues will be insufficient, costs for social security and medical services will increase. It also analyzed that not only debt but also potential growth rates are likely to decline.

The report forecasted that interest rates will affect the government debt-to-GDP ratio in the future. It explained that if interest rates rise by 1 percentage point from the 2% assumed in the baseline scenario, the ratio could surge to 141% around 2050. It also predicted that with a 1% interest rate, the government debt ratio would be 101%, and with 0%, it would be 83%.

The report analyzed that the Bank of Korea maintained a high interest rate of 3.5%, causing interest payment costs to increase from 0.9% of GDP in 2022 to 1.4% last year. It also projected that if the long-term risk-free interest rate is assumed to be around 2%, this cost could rise to 2.4% of GDP by 2050.

Although the government's fiscal expenditure decreased by 10.5% last year, the report analyzed that the government is still in deficit due to tax cuts and sluggish tax revenues. While forecasting a low possibility of passing the fiscal rules bill due to the Democratic Party's victory in the 22nd general election, it emphasized the need for fiscal reform to ensure debt sustainability.