The nation’s debt obligations have surpassed the 400 trillion won mark for the first time. The national debt, or the combined debt obligations of the central and local governments, was at 420.7 trillion won as of the end of 2011.
The increase of 28.5 trillion won over the previous year raised the ratio of national debt to gross domestic product from 33.4 percent to 34 percent. This must be seen as a matter of concern.
Nevertheless, it should not come as a surprise. That increase had been anticipated because the nation had to borrow and spend its way out the 2008-09 Great Recession. When compared with the upsurge of 3.7 percentage points in the 2009 fiscal year, the increase of a mere 0.6 percentage point should be manageable, as the government believes.
It is not the government alone that has confidence in its finances. Moody’s Investors Service gave high marks to the Korean government’s fiscal management when it raised the nation’s debt outlook from stable to positive, brightening the prospects of notching up Korea’s sovereign rating in the near future.
Moreover, it has set its sights on balancing the national budget for the 2013 fiscal year and, by doing so, lowering the debt burden as a portion of GDP that is set to grow. Barring the unexpected, the goal is attainable.
It goes without saying that fiscal prudence should continue beyond 2013. But there is no guarantee. On the contrary, the next administration may turn out to be spendthrift no matter which party wins the December presidential election. Both the ruling and main opposition parties had committed themselves to spending lavishly on welfare as a campaign promise during the run-up to the parliamentary elections on Wednesday.
Out of grave concern about fiscal indiscretion, the incumbent administration attempted to show in detail ahead of the parliamentary elections how much it would cost if the parties should make good on all of their welfare promises and what fiscal burden they would impose on the nation. But the administration had to give up in the face of a warning from the National Election Commission that it would breach the election law to make public the welfare cost analysis.
The basic information was already available, nonetheless. The ruling Saenuri Party promised to spend 90 trillion won on new welfare programs in five years from 2013. Even more profligate was the opposition Democratic United Party, whose new welfare projects were estimated to cost 174 trillion won.
Where will all the money come from? According to a recent study by the Korea Institute of Public Finance, the maximum amount the government can scrape up each year without a tax increase roughly equals to 1 percent of GDP, or 10 trillion won. If so, the next administration will have to borrow heavily, raise tax revenues substantially, or both, if it is to fulfill its election pledges.
But fiscal prudence cannot be compromised. With this premise in mind, the administration is urged to make public its cost estimate of each welfare project advocated by the rival parties and sponsor public debates on the proper level of welfare. Academics, members of nongovernmental organizations and others should be encouraged to actively participate in the process of building a public consensus on welfare spending.
