President Moon Calls for Massive Fiscal Spending

South Korean President Moon Jae-in rekindled the controversy over fiscal soundness by pushing for massive expansion in fiscal spending.

Controversies on fiscal soundness have emerged following a recent report that South Korean President Moon Jae-in and Deputy Prime Minister Hong Nam-ki, who is the head of the Ministry of Economy and Finance, have different opinions on a sovereign debt-to-GDP ratio of 40 percent.

Many experts are pointing out that the government needs to refrain from excessive fiscal expansion in that it should prepare for Korean reunification and rapid aging of the population. They also note that South Korea’s debt ratio cannot be directly compared with that of advanced economies as South Korea is not a key currency country.

The ministry announced on May 19 that South Korea’s annual budget is likely to exceed 500 trillion won for the first time in 2020 and that its sovereign debt-to-GDP ratio is forecast to top 40 percent next year. The ratio, which is a typical fiscal soundness indicator, rose from 38.2 percent in 2018 to 39.5 percent this year and is predicted to reach 40.3 percent in 2020 and 41.8 percent in 2022.

The deputy prime minister said on May 16 that the ratio would be maintained at 40 percent and the president asked why it should be, mentioning examples of OECD member countries. At present, the ratio is 107 percent in the United States and 220 percent in Japan and the OECD average is 113 percent.

“South Korea’s debt ratio may appear rather low with the OECD average exceeding 100 percent, yet a comparison based on the ratio of senior citizens shows that South Korea’s current debt ratio is far from being low,” said Korean Economic Association Director Lee In-shil. According to the National Assembly Budget Office, the ratio of senior citizens topped 14 percent last year in South Korea and its debt ratio was 38.2 percent at that time whereas France’s and Germany’s debt ratios were 32.6 percent and 36.8 percent when the same thing occurred in 1979 and 1972, respectively.

Some even point out that South Korea’s debt ratio should be below 40 percent given an increase in fixed expenses related to welfare spending, more government employees, etc. “Including public institutions’ debts, the ratio was as high as 60.4 percent in 2017,” one of them explained.

The office of the president explained that some scholars and the IMF are regarding South Korea as still having fiscal room and are advocating the president’s expansionary fiscal policy. However, the president’s stance was opposite when he was the head of an opposition party. He criticized the government in September 2015, saying that the sovereign debt-to-GDP ratio topped 40 percent in its annual budget plan for 2016 and such a high ratio can undermine fiscal soundness.

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