Korea tightens belt to improve fiscal heath amid accelerating debt

The South Korean government is tightening its belt despite a shortfall in tax revenue as it is committed to improving its fiscal health amid mounting debt.

According to an analysis by Maeil Business Newspaper on Wednesday on the latest data from the International Monetary Fund (IMF) of the fiscal report, Korea’s debt-to-gross domestic product (GDP) ratio is projected to rise by 9.1 percentage points to 57.8 percent in 2027 from 48.7 percent in 2020.

The projection represents the fastest debt growth rate among the 37 Organization for Economic Cooperation and Development (OECD) countries.

As part of efforts to contain snowballing debt, the Korean government can engage in intensive restructuring in its spending or issue additional treasury bonds. The government is refraining from issuing more bonds as it would lead to more debt.

The amount of government bonds maturing next year is expected to reach a record high of 92.3 trillion won ($70.3 billion), following the aggressive monetary easing implemented by the previous Moon administration during the pandemic.

The Ministry of Economy and Finance reported that government bond repayments have already surged by 14.9 percent to 85.9 trillion won this year.

The amount of government debt to be repaid next year is expected to increase further, adding more pressure on fiscal operations. The total amount of sovereign debt that the current government will need to repay over the next five years amounts to 373.6 trillion won.

When the Moon administration started its term in 2017, the amount of government bonds maturing in the years came only at 166 trillion won. However, in just six years, the repayments have more than doubled due to the acceleration of expansionary fiscal policies.

The dwindling tax revenue poses an even greater challenge.

In the aftermath of the economic downturn, tax revenue from January to April this year amounted to 134 trillion won, down 33.9 trillion won compared to the previous year.

Even if tax collection matches last year’s levels throughout this year, annual tax revenues will amount to 362 trillion won, an 8.6 percent decrease compared to the previous year’s levels.

There is a widely held belief that the government must inevitably restructure its expenses this year by significantly eliminating unnecessary projects that do not fall under national priorities.

Expectations grow that the government will introduce a system to leverage private capital instead of relying solely on the government budget.

Sung Tae-yoon, a professor at Yonsei University, emphasized the importance of managing fiscal costs to prevent them from becoming excessive amid falling tax revenue. He highlighted the need for effective preliminary feasibility studies to ensure that government funds are allocated only to essential projects.

In a separate announcement on Wednesday, the government announced a policy to reform the traditional budgeting process for priority expenditures, which involves thorough review of all budget projects across ministries.

In particular, state subsidies, which have faced criticism for creating moral hazards, will be reduced or eliminated from the upcoming budget.