[Duk-bae Park’s Window on Finance] Consider Reintroducing the ‘Pledge Ledger’

[Etoday, November 9,2023] Duk-bae Park (PERI Research Fellow/Real Estate · Regional Development)

[Duk-bae Park’s Window on Finance] Consider Reintroducing the ‘Pledge Ledger’

The other day, the Ministry of Strategy and Finance announced that the central government’s debt as of July 2023 was KRW 1097.8 trillion, which is already KRW 64.4 trillion more than the debt settled last year. Although this government has always declared a tight fiscal policy, the main reason for the increase is that tax revenues have not followed due to the sluggish economy and real estate market, and interest on government bonds has increased due to high interest rates.

Considering the interest on government bonds, which is expected to reach 30 trillion won next year alone, as well as mandatory expenditures that cannot be cut, the fiscal situation is not stable. As a result, not only will fiscal policy’s responsiveness to the economy be weakened, but it may also be difficult for the government to enact the fiscal rule, which aims to limit the budget deficit to within 3% of GDP.

Korea’s general government debt-to-GDP (D2, which includes central and local government accounting, fund debt, and non-profit public sector debt) has risen rapidly during the pandemic, reaching 54.3% at the end of 2022. Although this figure is still well below the levels of Japan, Greece, and Italy, and considerably more comfortable than that of the United States and other European countries. However, these countries are either key currency nations or quasi-key currency nations. Thus, comparing those where the currency itself serves as an ‘economic bulwark’ to South Korea, may not be entirely fair. According to the October Fiscal Monitor from the IMF, South Korea’s general government debt-to-GDP ratio in 2028 is projected to be the second highest among 11 non-key currency economies classified as advanced economies, trailing only Singapore. The IMF also cautions that the rate of increase in South Korea’s ratio will be the fastest among these economies.

The April 10 general elections next year are about five months ahead. In the meantime, the election season has been characterized by a flurry of campaign promises. Many of the promises made by candidates on both the left and right sides of the political spectrum have been hastily implemented with political intentions, lacking prior consultation with relevant authorities, input from experts, and a stable financial plan. Political pledges rooted in populism, along with promises to drive the fourth industrial revolution and generate more youth employment without specific analysis, have inundated. These populist commitments to welfare have also contributed to the deterioration of Korea’s financial situation. I am concerned that populist promises and legislation will persist in the lead-up to next year’s April 10 general election.

To be straightforward, we find ourselves in a desperate situation, requiring us to save as much money as possible for the future of the country. There is no clear sign of a domestic economic recovery; in fact, there are indications of near-deflation. With a declining potential growth rate and a rapidly aging, ultra-low birthrate, there is an increasing demand for spending, and productive capacity is worsening. If this trend persists, the fiscal situation will worsen for an extended period, with lower revenues and higher expenditures. Therefore, it is important to learn from the failures of fiscal populist countries such as Argentina, Greece, and Venezuela.

It is necessary to clearly distinguish populist policies, clearly assign responsibility for promises, and establish a system that can impartially evaluate changes in the fiscal soundness of the central government or local governments during their terms. Introducing systems like the so-called ‘pledge ledger,’ which calculates the funds required for all previously adopted promises and proposes ways to secure them, could be a good alternative. Given our current situation, it is not excessive to emphasize pledges for the future generation, such as fostering the fourth industrial revolution and creating jobs.

However, crucial policies related to the nation’s future need to be solid and effective without political burdens after the general election, resonating with the public. Furthermore, there is demand on welfare system that enhances fairness through appropriate fiscal policies to share the accumulated benefits of economic growth. In reality, looking at indicators of public social welfare spending among OECD countries, South Korea is at the lowest level. Despite the weakening fiscal capacity, through thoughtful policy considerations, efforts should be made to promote social integration and alleviate income and wealth inequality so that the South Korean economy can continue sustainable growth.

November 9,2023

<Duk-bae Park, PERI Research Fellow> Professor of Kookmin University