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[Editorial] Public sector debt

Welfare reforms needed to curb rapid growth

Korea’s public sector debt is continuing to grow at a fast pace, as welfare expenditures have increased sharply without a corresponding increase in the government’s tax income. As debt-financed welfare expansion is unsustainable, the government needs to find a remedy before the problem gets worse.

A tally released by the Ministry of Strategy and Finance shows Korea’s public sector debt reached 957.3 trillion won in 2014, amounting to 64.5 percent of the country’s gross domestic product.

Of the total, national debt, or D1, which is comprised of central and local government debt, accounted for 533.2 trillion won, or 35.9 percent of GDP.

General government debt, or D2, which combines D1 and nonprofit public institution debt, amounted to 620.6 trillion won, or 41.8 percent of GDP.

Public sector debt, or D3, consists of D2 and non-financial public corporation debt.

Compared with other OECD countries, Korea’s public sector debt-to-GDP ratio cannot be seen as particularly high. In fact, it is the second-lowest after Mexico. Yet the pace of growth is alarming.

In 2014, Korea’s public sector debt increased by 6.5 percent, about double the pace of its GDP growth. In the preceding two years, the growth rate was even higher, 9 percent in 2012 and 9.5 percent in 2013.

The rapid debt growth was due largely to tax shortfalls resulting from the sluggish economy. To finance the expanded welfare programs, the central government had to issue a large amount of bonds.  

Last year, non-financial public corporation debt stood at 408.5 trillion won, an increase of a mere 2 trillion won from 2013. The small growth reflected the government’s efforts to curb it. Yet non-financial public corporations still accounted for about 43 percent of public sector debt, equal to 27.5 percent of the country’s annual output.

Korea’s public sector debt probably has already surpassed the 1,000 trillion won mark as national debt (D1) is expected to have surged from 533.2 trillion won in 2014 to 595 trillion won in 2015, due mainly to an estimated 46.5 trillion won fiscal deficit, the country’s largest ever.

Public sector debt is expected to continue to rise rapidly in the years to come as the government’s tax revenue is unlikely to grow as fast as welfare expenditures under current policies.

The government is sticking to the policy of expanding the welfare state without raising tax rates. Its strategy is to increase tax revenue by revitalizing the economy.

Yet the economy is unlikely to get out of its low-growth trap soon. Even if the economy does stage a robust recovery, tax revenue is not expected to increase much because these days economic growth is not accompanied by job growth. Tax revenue grows when the economy adds a large number of well-paying jobs.

All this implies the government needs to either collect more taxes or undertake welfare reforms to curb Korea’s national and public sector debt.

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