National Debt
The actual size of the national debt has been a highly controversial topic during past presidential elections in Korea. Heated debates between ruling and opposition parties were partly because of the fact that the size differs greatly depending on whether the liabilities of public-sector entities are included or not.
On July 4, the Ministry of Strategy and Finance and the Korea Institute of Public Finance decided to factor in seven state-owned enterprises (SOEs), including The Bank of Korea, the Korea Development Bank, the Financial Supervisory Service and the Industrial Bank of Korea, along with 432 public institutions. The change is likely to raise total national debt by at least 1.3 quadrillion won. Contingent liabilities such as those for pension payments and guarantee liabilities are excluded from this.
Liabilities of State-owned Enterprises Included in Calculation
The government has made use of the accrual-basis general government debt as the major statistical tool for the calculation. According to this method, which does not take liabilities in the public sector into account, Korea’s national debt amounted to 468.6 trillion won as of the end of fiscal year 2011, which is equivalent to approximately 37.9% of the national GDP. Since the percentage is very low compared to Japan's 205.3%, the United States' 102.2%, and Germany's 86.4%, the government has highlighted this in order to emphasize its fiscal sustainability.
However, the issue is the massive liabilities of public entities which are not included. As of last year, the total liabilities of the 295 organizations subject to the Act on the Management of Public Institutions totaled 493.4 trillion won. This figure soars to over 566 trillion won when those of the 137 institutions governed by the Local Public Enterprises Act are taken into consideration. As a result, the overall percentage skyrockets to 80% or more. This is why many experts and organizations, including the IMF and World Bank, have claimed that public-sector liabilities be included in the measurment.
Monetary Stabilization Bond of The Bank of Korea Also Factored In
According to the new standard, the seven public enterprises in the banking sector are factored into the statistics, although none of them are subject to any of the acts mentioned above, in order to follow the global trend. At present, the central banks of developed countries such as Britain and France are regarded as public institutions when measuring the scale of national debt.
Therefore, all of the bonds issued by SOEs down the road will be categorized into national debt, including the Industrial Financial Bond balance of 32.93 trillion won of the Korea Development Bank, and the Small and Mid-size Enterprise Financial Bond balance of 65.5 trillion won of the Industrial Bank of Korea. The Monetary Stabilization Bond of The Bank of Korea is also likely to be reflected because the tool is equivalent to treasury bonds employed by advanced economies for monetary supply control and open market operation. The central bank’s Monetary Stabilization Bond totaled 169 trillion won as of the end of May this year. “There will be more discussions and coordination of opinion before deciding whether to include the Monetary Stabilization Bond in the calculation,” said Woo Beom-ki, manager at the Fiscal Management Division of the Fiscal Management Bureau of the ministry.
Contingent Liabilities Not Included For Now
In the meantime, the government is not planning to add liabilities on guarantees and contingent liabilities such as the National Pension and the Korea Teachers Pension to the statistics.
The pension allowance side currently totals 436.9 trillion won. When this is included, national debt surges to 902.4 trillion won. There is currently no global consensus regarding this issue. The US, Canada and Australia include their pension liabilities into the national debt calculation contrary to countries in the EU region.