South Korea’s national debt has been rapidly increasing in recent years, reaching nearly 450 trillion won over the past five years (2018-2023). This surge represents a staggering 2.3-fold increase compared to the previous five-year period, which saw an increase of 190 trillion won. The primary drivers behind this escalation are the substantial rise in fiscal expenditures due to the COVID-19 pandemic and the burgeoning welfare budget prompted by low birth rates and an aging population.
Amid stagnant economic growth rates hovering around 1-2%, government revenue struggles to keep pace with spending, leading to a continuous rise in debt issuance. This trend has sparked concerns about a potential economic crisis stemming from a downgrade in sovereign credit ratings.
According to the ‘2023 Financial Statement’ released by the South Korean government on April 11, last year’s government debt-to-GDP ratio stood at 50.4%. This marks a significant increase from 2020 when the ratio first breached the 40% threshold at 43.6%. It took South Korea seven years (from 2004 to 2011) to transition from the 20% range to the 30% range of government debt as a percentage of GDP, and nine more years (from 2011 to 2020) to climb from the 30s to the 40s.
Projections suggest that the government debt-to-GDP ratio will continue to rise, reaching 51% this year and 53% by 2027. However, amid the backdrop of low growth rates, there are concerns that intensified populist competition in the political arena could accelerate this trend, potentially surpassing the 60% mark in the near future. Kim Woo-cheol, a professor at the University of Seoul’s Department of Taxation Science, remarked, “Given the plethora of tax cuts and fiscal spending policies aimed at garnering votes in elections, there’s a high likelihood that the government debt-to-GDP ratio will deteriorate more than projected.”
Some argue that there’s less cause for alarm regarding South Korea’s government debt-to-GDP ratio compared to major advanced economies. According to the International Monetary Fund (IMF), as of 2022, South Korea’s general government liability-to-GDP ratio stood at 53.5%, significantly lower than that of the United States (144.2%), the United Kingdom (104.0%), France (117.3%), and Japan (254.5%). However, experts caution against direct comparisons between South Korea and countries holding reserve currencies like the dollar, euro, or yen.
The Korea Economic Research Institute (KERI) suggests that reserve currency countries have estimated appropriate general government liability-to-GDP ratios ranging from 97.8% to 114%, while non-reserve currency countries should aim for ratios between 37.9% to 38.7%. South Korea surpasses this benchmark by more than 10 percentage points, indicating a relatively high level of government debt compared to other non-reserve currency countries.
Furthermore, South Korea’s projected general government liability-to-GDP ratio for this year stands at 55.6%, making it the third-highest among the 13 non-reserve currency countries classified by the IMF as advanced economies, following Singapore (168.3%) and Israel (56.8%).
The continuous expansion of national debt reflects a situation where spending exceeds the revenue generated through taxes and other means. Last year, South Korea’s consolidated fiscal balance recorded a deficit of 36.8 trillion won. The consolidated fiscal balance without social security fund reported an even larger deficit of 87 trillion won. The consolidated fiscal deficit without social security fund-to-GDP ratio, a crucial indicator of a nation’s fiscal health, reached 3.9%.
Another concerning factor is the persistent increase in debt without payment resources. According to the Ministry of Economy and Finance, debt without payment resources reached 726.4 trillion won last year, marking a 7.5% increase from 2022. The proportion of debt without payment resources to total government debt also rose from 63.3% to 64.5% during the same period.
