South Korea's interest payments on government bonds are projected to reach 40 trillion won ($28.8 billion) next year, as global credit rating agency Moody's raised concerns about the country's long-term fiscal health. According to a report in the Seoul Economic Daily on the 18th, the outstanding balance of Korea Treasury Bonds stood at 1,241.6 trillion won as of the end of July this year. The value of bonds set to mature is also surging, from 90.5 trillion won this year to 108 trillion won next year. Given the recent rise in funding costs, the government's interest expenses from refinancing treasury bonds and other measures will only grow larger. At this pace, the amount spent on treasury bond interest payments is expected to approach 40 trillion won next year, up from 17.27 trillion won in 2020.
Moody's also expressed concern the same day over Korea's rapidly rising national debt. The agency projected that the ratio of government debt to gross domestic product (GDP) would fall to around 47% this year, down from 49% a year earlier. While government spending is increasing, tax revenue is also rising thanks to a boom in the semiconductor sector. Still, Moody's noted that the figure marks a sharp increase from 35% in 2019, and said fiscal pressure would grow over the long term due to an aging population and mandatory spending tied to defense and security.
Korea is not yet at a stage where a fiscal crisis is a concern. But once a fiscal deficit begins to widen, it tends to accelerate. The government should treat the United States, Japan and Britain — all struggling with fiscal deficits — as cautionary examples. Yields on 30-year U.S. Treasuries and 10-year Japanese government bonds have soared to their highest levels in 19 and 30 years, respectively. A rise in government debt pushes up market interest rates, increasing the burden of interest payments on households, businesses and the government alike, while also dampening the real economy. Because Korea is not an issuer of a reserve currency, the impact is bound to be far greater.
Now is by no means a time to overestimate the country's fiscal capacity. A principle is needed to manage spending and debt within the bounds of the additional revenue generated when tax conditions are favorable. If the semiconductor upturn falters, a shortfall in tax revenue could recur, ultimately trapping the country in a vicious cycle of covering gaps by issuing deficit-financing bonds. The government must refrain from populist spending and devote its full efforts to building a stable revenue base. Above all, it should hasten the legislation of fiscal rules to control the pace of expansionary fiscal policy.
