Not Immune to Concerns
The recent downgrade of the United States credit rating by Fitch due to fiscal deficits and government debt holds important lessons for South Korea, which finds itself grappling with an inability to break free from the addiction to expanding its fiscal measures. Under the stewardship of the Moon Jae-in administration that maintained an expansionary fiscal stance, the nation’s debt has ballooned from 600 trillion won (US$461.54 billion) to a staggering 1,000 trillion won, representing an alarming increase of 400 trillion won. Since the advent of the COVID-19 pandemic in 2020, the average annual increase in national debt has soared to 13.9 percent. This situation reveals that the U.S. credit rating downgrade is not a concern exclusive to the United States.
On Aug. 2, the Ministry of Economy and Finance held a meeting with relevant institutions, including the Bank of Korea, to assess the market impact of the U.S. credit rating downgrade. First Vice Finance Minister Bang Ki-sun said, “We believe that the impact will not be greater than the U.S. credit rating downgrade by Standard & Poor’s in 2011,” but also mentioned, “We will swiftly implement measures to ensure market stability if necessary.”
However, South Korea is not immune to similar concerns. The national debt of South Korea central government has skyrocketed from 680.5 trillion won in 2018 to 1,067. 7 trillion won at the end of last year. Correspondingly, the ratio of national debt to gross domestic product (GDP) has surged from 35.9 percent to 49.6 percent. This, in turn, has contributed to South Korea’s decline in fiscal competitiveness, plummeting from 22nd place in 2018 to the 40th spot this year in the fiscal category of the Swiss-based Institute for Management Development’s (IMD’s) World Competitiveness Ranking.
The challenges persist into the current year. An impending revenue shortfall exceeding 40 trillion won presents a formidable obstacle. Despite securing a deficit of 58.2 trillion won in the budget approval process last year, the anticipated deficit of 100 trillion won for this year is inevitable as tax revenues are expected to fall short by a whopping 40 trillion won. This predicament casts a shadow on the credibility of the current administration’s sound fiscal stance.
Moreover, the National Assembly is witnessing a flood of “compassionate” budget proposals as next year’s general elections approach. While the ruling and opposition parties initially found common ground in relaxing the criteria for preliminary feasibility studies for projects related to social indirect capital (SOC), the proposal was deferred due to public outcry branding it as a prioritization of local constituency budgets in pursuit of electoral gains. Additionally, Lee Jae-myung, the leader of the main opposition Democratic Party, went a step further by advocating for a “35 trillion won supplementary budget for public welfare,” stating, “we should even consider issuing national bonds.”
The establishment of stringent fiscal rules to curb unchecked expenditures within the National Assembly remains dormant, further underscoring the intricate landscape. International credit rating agencies such as Fitch and Moody’s have previously given positive evaluations of South Korea’s introduction of fiscal rules and recommended the adoption.