The Korea Herald


[Yoo Choon-sik] Praises, and concerns, over Yoon’s clampdown on borrowings

By Korea Herald

Published : Feb. 5, 2024 - 05:31

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As we entered February, many of us who resolved to lose weight and achieve a healthier, slimmer body in the new year may be growing restless with the gradual pace of progress.

However, it’s important to resist the urge to drastically alter your plan for the remainder of the year in a way that could compromise your health, which is the true objective of these efforts.

Similar advice should work for President Yoon Suk Yeol. Having made significant progress in curbing the red-hot surge in the country’s government debt over the past few years, he is now facing growing voices of concern over the huge and increasing costs that his campaign has incurred on the economy and living conditions of the people.

While South Korea’s export-dependent economy looks set to gather some pace this year after suffering its worst showing in modern history (excluding crisis years), projections by public and private institutions suggest growth will likely be just around 2 percent -- another poor reading given the weak comparison year of 2023.

Yoon’s unswerving resolve to put the brakes on the swelling government debt deserves wide recognition when taking into account the upsurge in the debt ratio to annual gross domestic product during the preceding administration’s five-year rule by a pace never seen since the country adopted the current presidential system in the 1980s.

Government debt soared by 55 percent during the Moon Jae-in administration, rising almost three times as fast as the annual GDP and lifting the debt ratio by a whopping 10.7 percentage points, compared with gains of less than 5 percentage points on average for the prior two administrations, Finance Ministry data shows.

It was the fastest rise in the debt ratio for any administration since the country adopted a single five-year presidential system in 1988, even nearly double the gain of 5.7 percentage points during the Kim Dae-jung administration, which had to rebuild a country ruined by the shocks from the 1997-98 Asian financial crisis.

Although the Moon administration had little choice but to borrow more to fund financial support measures to help the people absorb the shocks from the COVID-19 pandemic, controversies remain given that the economic damages in South Korea were much smaller than in countries relying more on domestic consumption.

The Yoon administration’s ruthless campaign to contain government borrowing has been a success on the surface, keeping the rise in the debt ratio at an estimated 1 percentage point in 2023, compared with an annual average gain of 2.1 percentage points during the previous administration.

South Korea’s government debt ratio of just about 50 percent still can be the object of envy for many more mature industrial countries, such as the United States, Britain and France, whose debt ratios stand well above 100 percent, not to mention Japan’s exceptionally high ratio of nearly 250 percent.

The Yoon administration emphasizes that fiscal discipline should be kept sound as much as possible, given that budget spending is widely expected to grow exponentially over the coming decades, along with the world’s fastest-growing population of the elderly and continuing security threats from North Korea.

While it more than makes sense, there are also voices of concern that focusing too much on reducing budget expenditures in a wholesale manner to suppress borrowing could lead to less financial support for the core industrial sectors and future-oriented research and development activities at a time when technology dominates everything.

South Korea has risen from a poor war-torn country to rank among the high-income economies in just two generation thanks to massive and bold investments in the heavy manufacturing, petrochemicals and electronics sectors with support from the government. However, it is now faced with a completely new and much harsher set of challenges.

While the government’s role in managing an economy the size of South Korea has significantly changed in step with the changing dynamics of the global economy, companies and industries still need help or support from the government in competing with giant rivals around the world in sectors requiring massive and strategic investment.

There is no denying that rebuilding fiscal discipline is important as the country sails through what will most likely be far tougher waters than before.

However, cutting down on everything should not be the end purpose of this drill and the government should spare no effort to agonize over the economic difficulty facing households and companies, for whom every dollar cut means a lot.

Just as you need to be extremely careful with your body when you go on a diet for the purpose of getting healthier, it can never be overemphasized that any effort to rebuild fiscal standing should be implemented to the extent that the core sectors of the economy and society continue to get financial support for long-term sustainability.

The Yoon administration has promised from the beginning that its economic policy would help the private sectors maximize their potential by removing unnecessary regulatory hurdles and giving them full autonomy, while at the same time minimizing the role of fiscal spending.

The time has come for the government to prove action follows the words.

Yoo Choon-sik

Yoo Choon-sik worked as a chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. -- Ed.