Government Debt and Maintaining Fiscal Soundness in Korea
2010/06/21 7 Comments
“Been there, done that”, many Korean people would’ve said when they saw Greece seeking for a bailout (support) from IMF (International monetary fund) and EU (European Union) as their government balances heavily deteriorated. Korea not only had experiences in IMF bailout program more than a decade ago, but successfully overcame a difficult period. Even though the world economy is still recovering from a financial turmoil in 2008, these financial meltdowns from Greece and other southern Europe countries could lead to another hard blow for lagging world economy. However, not all countries are running severe deficit on their government balances. Korea is considered to sustain its’ fiscal soundness of government balance. In regards to national government balance and related matters, fiscal affairs department of IMF issued their world economic and financial survey in order to monitor fiscal status of each region and countries. According to the recent issue of fiscal monitor by IMF, the average gross general government debt-to-GDP ratio for advanced economies is forecasted to rise from almost 91 percent at the end of 2009 to 110 percent in 2015. United States and United Kingdom, two countries strongly affected by recent financial crisis shall experience the largest increase of its debt where their growth prospects are weakened than others. On the other hand, for emerging economies, debt-to-GDP ratios are expected to either stay as current level or decline in 2011. Their sustainable growth and lower interest rate contributed to controlling fiscal balance as they pledged.
Hong Kong is projected to reach the lowest ratio by 2015 (0.5%), Australia (20.9%), Korea (26.2%), New Zealand (36.1%), and Switzerland (36.2%) are expected to follow. In comparison, Japan is expected to reach the worst level of debt ratio over GDP in 2015 projecting 250%. Already troubled Greece’s ratio is expected to be increased by 140.4%; Italy (124.7%), United States (109.7%), Portugal (98.4%), France (94.8%), and Spain (94.4%) are among countries projected to have high debt over GDP ratio over years to come.
Compared to other countries, Korean government successfully managed to maintain relatively solid fiscal balance and sustained its level for years. IMF reported that debt-to-GDP ratio is even going to be lower to mid-20% by 2015, which is 2nd lowest ratio among advanced economies.
Regardless of a sunny forecast and positive reports on Korean economy, it is believed that a couple of issues can not be overlooked in order to sustain the stable level of fiscal balance. One of the factors could be spendings on the healthcare system. Since Korea has extremely fast aging demographics, inevitably spendings on healthcare system would increase significantly. Potential tax revenue is expected to decrease due to the low birth rate; this could lead healthcare spendings to become a pretty heavy burden. Also escalating amount of debt derive from local government shall be monitored. The recent government study showed that the debt amount of local government estimates approximately KRW 25 trillion (7.96% of total government debt). Though debt ratio over total government debt is being consistent, debt amount of local governments have grown significantly by 34.15% in 2009 compared to average 4% in previous years. Once local governments are in trouble, it is evident that the central government is to be affected eventually. Maintaining well-balanced financial status with local government is necessary to consider as well.