Government Debt Exceeds 165 Trillion Won

Government debt for 2003 increased dramatically to a record high of more than 165 trillion won.

As a result, the government is expected to have difficulties in using its budget to deal with issues such as aging population and economic recession.

The continued increase of government debt is projected to place a heavier burden on taxpayers.

According to the Ministry of Finance and Economy (MOFE) on April 23, as of the end of 2003, government debt (based on the International Monetary Fund standard) jumped to 165.709 trillion won, which is a 32.096 trillion won, or 24 percent, increase from the same period of the previous year.

Consequently, government debt per person rose by 23.3 percent from 2.804 million won in 2002 with a total population of 47.64 million to 3.457 million won with a total population of 47.92 million.

Government debt has continued to climb from 111.39 trillion won as of the end of 2000 to 122.66 trillion won in 2001, 133.613 trillion won in 2002, and exceeded 165 trillion won in 2003.

Why did the debt rise so dramatically?

Reasons behind the record high government debt include 14.4 trillion won incurred from conversion of hard-to-recover public fund into government bonds, 12.8 trillion won from issuance of foreign exchange stabilization bond to prevent fluctuations in the forex market, and three trillion won used to make up for budget deficit.

Given that public fund of 49 trillion won, unlikely to be recovered, will continue to be converted into government debt as did 13 trillion won (based on principal) last year and 12 trillion won each year starting from this year for three years, the government is expected to have more than 200 trillion won in debt in 2006.

Ratio of government debt to GDP of 2003 was 23 percent, which is a 3.5 percent increase from 19.5 percent of the previous year.

Why is a sudden rise in government debt alarming?

The government argues that compared with advanced countries, the size of Korea’s government debt has not yet reached “an alarming level.” “According to the Organization for Economic Cooperation and Development (OECD) standard, Korea’s ratio of government debt to GDP is 18.7 percent, which is far lower than an average 78.2 percent of other OECD member countries,” said the head of the MOFE’s Treasury Bureau Lee Cheol-hui.

However, as experts point out, “Simply comparing the number with that of advanced countries is meaningless.” “The ratio of government debt to GDP is low in Korea only because the share of the elderly population is lower than that of advanced nations,” said Kim Yong-ha, Economics and Finance professor at Soonchunhyang University. He warned, “Budget deterioration could possibly have reached an alarming level already considering rapid aging of the population, relocation of the administrative capital, and variables related to North Korea’s nuclear issue.”

This means that the government should stay vigilant as budget deterioration inevitably leads to heavier tax burdens.

Jong sik Kong kong@donga.com