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(EDITORIAL from Korea Times on April 7)

All News 07:01 April 07, 2021

Looming danger of debt
Prepare for exit strategy to ensure fiscal health

The country's national debt has increased to its highest level, driven by the unprecedented public health crisis. The Ministry of Economy and Finance said Tuesday that the national debt, comprised of bond issuances and borrowing by central and local governments, hit a record 846.9 trillion won ($750.5 billion) as of the end of last year, up 17.1 percent from 2019.

The double-digit increase was inevitable for the country to minimize the economic fallout from the COVID-19 pandemic. The Moon Jae-in administration executed four rounds of supplementary budgets totaling 67 trillion won to offer emergency relief to individuals and businesses hit by the worldwide coronavirus outbreak. It had to increase the issuance of treasury bonds to fund the aid. Large-scale economic stimulus packages also raised the debt level.

As a result, the country's debt-to-GDP ratio jumped to 44 percent in 2020 from 37.7 percent in 2019. It is predicted to climb further to 47.3 percent this year when the level of government debt is expected to increase to 965 trillion won. Some economists forecast the ratio will go up to 60 percent in 2024, because welfare expenditures will grow sizably amid the tumbling birthrate and the rapid aging of the population.

Policymakers argue, however, that the government had no other choice but to resort to fiscal expansion to help people and businesses ride over the pandemic, and stimulate the economy which contracted 1 percent last year. No one can discredit such an expansionary policy aimed at cushioning the virus' shock. However, the financial authorities need to pay heed to growing concerns about the deteriorating fiscal health. The country's consolidated budget balance suffered a deficit of 112 trillion won in 2020, marking the largest figure in nine years.

Also worrisome is that a broad measure of the country's total liabilities, which include future pension payments, reached 1,985 trillion won, up 241 trillion won from a year before. The increase was the largest since 2012. It is worth noting that the amount exceeded Korea's GDP estimated at 1,924 trillion won for the first time since 2011.

Another problem is the nation's household debt which totaled 1,726 trillion won at the end of last year, up 7.9 percent from 2019. The increase was largely due to a surge in mortgages amid runaway housing prices. This debt has already become a ticking bomb that could lead to serious economic woe. We should not ignore the growing debt risk, particularly when market interest rates are rising steadily.

In this situation, the financial authorities should prepare an exit strategy to better manage both state and household debt. They need to take long-term measures to regain fiscal health. Otherwise, the country cannot achieve sustainable economic growth even if it gets out of the pandemic-driven recession with the help of bold fiscal expansion and monetary easing. No one can downplay the looming debt danger.
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