The national debt of South Korea last year was 1,985 trillion won, 241 trillion won higher than the previous year. The size of the debt and the year-to-year increase were both the largest in history. The government passed the FY2020 national financial report on Tuesday. The household debt also rose to 98.6 percent of the GDP, which is the highest level on record. Both the nation and households have accumulated a huge amount of debt, and it is bound to increase even more as tax revenue and earned income dwindle. The country is practically in a vicious cycle of creating more debt to pay the existing debt without reducing expenses.
The national debt, which is consisted of the government debt and pensions to be paid to service people and public officials, exceeded the country’s GDP, which was 1,924 trillion won last year, for the first time. Four supplementary budget formulations added 111.6 trillion won in debt and pension provisions increased by over 100 trillion won. As the government is recruiting more public officials, pension provisions will continue to increase.
While debts are snowballing, government spending is also growing. The government decided to maintain fiscal expansion and previously announced that the next year’s budget will be over 600 trillion won, which is about 50 percent higher than the budget of 400 trillion won at the beginning of the current administration. Meanwhile, tax revenues are drastically falling due to various factors, including COVID-19.
Household debt is also on a sharp rise. According to the Korea Institute of Public Finance, South Korea’s household debt to GDP ratio was around 70 percent during the 2008 Financial Crisis, which was similar to advanced countries back then. However, the ratio rose 27.6 percentage points for South Korea, while other developed countries experienced a decrease. The quality of the household debt is also poor for South Korea with approximately seven times more short-term debts to be paid within a year than major advanced countries.
With the increasing household debt, people’s income is not on the same track. Both earned income and business income decreased in the fourth quarter of the last year, as jobs were cut and the burden on the self-employed rose due to COVID-19. With growing household debt and dwindling income, consumption will be contracted. This will lead to less tax revenues, potentially putting the entire country into a vicious cycle of debt.
While it may be inevitable to expand financial expenses during the pandemic, wasteful spending or rapid increase of debts should not be allowed. However, the ruling party is acting as if the national finance is a widow's cruse. Pandemic relief fund is snowballing in amount after each evaluation and preliminary feasibility study, which was introduced to prevent wasteful spending related to national projects, are often skipped. Either the government or the household needs to reduce unnecessary spending as much as possible with reduced income. More debt should not be passed onto the younger generations struggling to land a job.