An opposition lawmaker, announcing his bid for the presidency on Tuesday, pledged to build a “debtless society.” Few would believe his utopian promise was feasible. But many would undoubtedly be tempted to vote for him if he only could freeze the level of national debt at the current level and reduce that of household debt to a manageable one.
Controlling debt, both national and household, is one of the greatest issues of concern for the government. Public and private institutions are warning that the nation’s economy would go into a tailspin if no action were to be taken promptly.
Among those sending out the warning signals is the National Assembly Budget Office, which says each baby born this year will have 340 million won in lifetime tax obligations minus entitlements if no action is taken by the government to curb welfare and other types of spending. In a report on the 2012-60 outlook of public finances, the office says that the low birthrate and the fast aging of the population will push potential growth below 3 percent in 2025 and 2 percent in 2055.
The consequences are horrendous. A slide in growth potential will lead to a decline in the government’s revenues as a percentage of gross domestic product ― 26 percent this year to 22.1 percent in 2060, as projected by the office. On the other hand, increases in welfare spending, interest payments, public-sector annuities and others are projected to push up the government’s expenditure from 24.8 percent now to 35.4 percent in 2060.
If no action is taken to balance the budget, the Budget Office says, national debt will soar from 34.2 percent of GDP now, or 448 trillion won, to 100 percent by 2043, 200 percent 2059 and 218.6 percent in 2060. It should not come as a surprise if Korea were to go bankrupt between 2043 and 2059, as Greece virtually did with 160 percent debt.
The government may be complacent now that the ratio of national debt to GDP remains relatively low. If so, it will be a matter of time before the public finances becomes a shambles, with pressure mounting on the government to increase welfare spending in particular. If it is to avoid a fiscal disaster, the government will have to start long-term tax and pension reforms now.
Even more serious than national debt is household debt, which stood at 911.4 trillion won, or 81 percent of GDP, as of the end of March. The level was higher than the OECD average of 73 percent and that of Greece with 61 percent.
When Korea was driven into a financial meltdown in 1997, the culprits were corporations that had gone on a borrowing-and-spending binge. Should a similar crisis befall the nation next time, it will most likely have been caused by runaway household borrowing.
The Korea Chamber of Commerce and Industry, a special interest for the business community, took an unusual action when it expressed its concern about household debt earlier this month. It said the high level of household debt could cause an economic crisis in the nation if an economic recovery were delayed for long.
True, household debt declined by 530 billion won from the year-end to 911.4 trillion won at the end of March, as the banks had been pressured by the government to cut down on their outstanding household loans. But that is not an ultimate solution. Hard-pressed households are cashing their savings deposits or borrowing money from private lenders at higher interest rates than those available at banks, insurance companies and savings banks.
A fundamental solution lies in growth promotion and job creation, which will increase household income, as noted by the Korea Chamber of Commerce and Industry. Still better, the pursuit of a growth-first policy will also help generate greater revenues for the government and, by doing so, help reduce national debt.
As such, priority in the allocation of national resources should be given to growth, not income redistribution and welfare, when the next administration is inaugurated. The nation needs a president who is capable of preaching delayed gratification as a virtue and putting growth before welfare in policy.
