Cho Dong-chul, the president of Korea Development Institute (KDI), publicly issued a stark warning on government debt, going so far as to state, “The country will collapse.” In particular, he cautioned that South Korea’s national debt-to-gross domestic product (GDP) ratio could skyrocket to over 250 percent by around 2070 if the reform of the pension system fails and is compensated for by government debt.
President Cho is scheduled to participate in the second plenary session of the “2024 Economics Joint Academic Conference” organized by the Korean International Economic Association and held at Seoul National University on Feb. 2. He is expected to address the topic of “Debt Issues, What Should We Do” during the keynote speech. The KDI released the keynote speech on the Feb. 1.
President Cho pointed out, “In South Korea, the debt burden is significantly higher for households, businesses, and the government compared to other advanced countries.” Among the 30 countries in the Organisation for Economic Co-operation and Development (OECD), excluding city-states, South Korea ranks 4th in terms of household debt-to-GDP ratio and 3rd in the combined ratio of household and corporate debt.
President Cho expressed particular concern about government debt among the high debt burden of the three economic entities. When examined through the long-term lens, which accentuates demographic shifts such as low birth rates and aging, he suggests that government debt may become more severe than private debt.
Private debt issues can be addressed through market principles involving restructuring between bondholders and debtors. To be sure, this process may entail painful experiences similar to the repercussions of the “credit card crisis” in the early 2000s, leading to subdued private consumption and economic downturns.
However, an excess of government debt could pose the risk of government bankruptcy. Moreover, there is a potential for it to escalate into a sovereignty issue for the nation, creating severe problems. President Cho added, “The rapid recovery within about a year from the Asian financial crisis in the 1990s was attributed to robust government finances.”
According to internal estimates at the KDI, South Korea’s debt-to-GDP ratio is projected to exceed 100 percent by 2050, with a high likelihood of continuing to increase rapidly thereafter. President Cho stated, “The additional burden arising from a one-year delay in pension reform is estimated to be tens of trillions of won,” and added, “If we fail to reform the pension system and begin compensating for the shortfall with government debt, it could surge to over 250 percent by around 2070.”