Gov’t Issues 18T Won in Deficit Bonds

Government bonds issued to cover the national deficit caused by budget management (debt financing bonds) have been on a sharp rise and are expected to exceed 50 trillion won by the end of this year.

In particular, as the recent low economic growth has worsened the tax base, the size of debt financing bonds issued during the recent two years amounts to that of debt covering bonds issued for the two years following the 1997 foreign currency crisis (1998-1999).

According to the estimate released on August 29 by the Ministry of Finance and Economy and the Finance and Economy Committee under the National Assembly, if the government issues the maximum amount of debt covering bonds, 9.3 trillion won, the remainder of debt financing bonds by the end of this year will reach 50.1 trillion won.

This is two times larger than the debt financing bonds issued five years ago, at the end of 2001, which were 25.1 trillion won, and it is an 82.1 percent increase (22.6 trillion won) from the 27.5 trillion won at the end of 2002, right before the Roh administration was launched.

Debt covering bonds were issued for the first time in 1998, right after the 1997 foreign currency crisis. After 10.4 trillion won worth of debt financing bonds were issued in 1999, and the issuance of such bonds has remained at one to three trillion won every year.

However, the size of debt covering bond issued has soared recently to nine trillion won last year and to 9.3 trillion won this year, and as a result, the amount of such bonds issued during the recent two years (18.3 trillion won) is about to reach that of bonds issued during 1998 to 1999, right after the 1997 financial crisis, which amounted to 20.1 trillion won.

As the issuance of debt covering bonds is increasing, the interest on the principal alone is reported to cost the government one to two trillion won each year.

The fundamental reason behind the recent increase in the issuance of those bonds is believed to be government spending which has not been reduced at all while tax inflow has been decreased due to the sluggish economic recovery.

For this reason, some point out that stricter standard should be applied to the issuance of government bonds and that the bonds issued should be managed more carefully.

smhong@donga.com