South Korea breaks the national debt taboo to solve inequality

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Korea Economic Update

South Korea may have pulled its economy out of the recession caused by the coronavirus, but Seoul’s power corridors are rarely celebrated. Instead, the focus has shifted to a dilemma that is universal and cannot be ignored: inequality.

“We are looking at this issue with a sense of crisis,” Prime Minister Kim Fu-kyun told the Financial Times.

He admitted that the growing inequality and the plight of the country’s impoverished elderly population (a generation of South Koreans who rebuilt the country after the Korean War) was particularly “painful”.

Large shipments of computer chips and smartphones, as well as cars and ships helped save the world’s tenth largest economy. But optimistic data obscures the long-term economic situation of many Koreans: unparalleled poverty among the elderly, high youth unemployment, remote housing prices, rising household debt and soaring education costs.

And Daozhe, the deputy finance minister in charge of the government budget office, said that supporting the low-income people most affected by the epidemic is the top priority of the national fiscal policy.

“As the economy recovers, we see [widening] As the incomes of well-adjusted people rebounded rapidly during the epidemic, while the job market for disadvantaged groups in society is still weak, the gap between the rich and the poor is wide. “He said.

Household debt has almost doubled in the past decade, reaching a record 180.6 billion won ($154 million) in the second quarter. After months of coronavirus restrictions hit small businesses, many self-employed individuals, who account for nearly a third of the workforce, saw their incomes drastically reduced.

Although there are at least 20 new policies and regulations to control price increases, middle-class families have been shut out of the real estate market. Since President Moon Jae-in took office in 2017, apartment prices in Seoul have almost doubled.

Now, more than 40% of South Koreans over the age of 65 are affected by poverty, which is the highest proportion among OECD member countries, and nearly one-tenth of South Korean young people are unemployed.

Seoul apartments

Since President Moon Jae-in took office in 2017, housing prices in Seoul have almost doubled © Washington Post, Getty

Last month, despite the uncertainty brought about by the Delta variable, the Bank of Korea unexpectedly Raise interest rates, On the basis of fiscal imbalances. It was one of the first central banks to raise interest rates since the pandemic began.

Since the dark period of the Asian financial crisis in 1997/98, the core of the government’s response to inequality has been the decision to break the debt taboo of South Korean economic planners. Seoul is now happy to expand its national debt beyond the 40% threshold of GDP that policymakers have insisted on over the past decade.

under Record budget plan It was announced this month that Seoul will deploy Won604.4tn next year, an increase of 8.3% from this year’s initial expenditure, for expanding welfare, creating jobs and developing emerging technologies.

The expenditure will increase the debt-to-GDP ratio next year from 36% in 2017 to 50.2%. According to the government’s proposal, by 2025, it has set the medium-term debt ceiling from 47.3% this year to 60% of GDP.

“The coronavirus crisis has exposed social polarization. If left unchecked, it will cause big problems for social unity. We need to actively respond,” Ann said.

The International Monetary Fund estimates that by 2025, South Korea’s debt ratio will still be lower than one-third of Japan’s and only half of that of the United States.

But worries linger. The rapid aging of the population and the world’s lowest birth rate have exacerbated concerns about the rapid rise in government debt, which may increase South Korea’s financial burden.

According to data from the state-run Korea Economic Research Institute, if the national debt continues to increase at this rate, every newborn child will owe more than 100 million won in debt when he becomes a high school student.

Park Seok-gil, an economist at JPMorgan Chase, said: “The country needs countercyclical fiscal policies to achieve stable and sustainable growth.”

“But it’s not clear whether the government is willing to reduce spending when the economy recovers. Once you make a commitment to welfare policies, such as a designated cash distribution plan for target groups, it’s difficult to get it back. In any case, given the rapidly aging society, Rigid welfare spending will definitely increase.”

The government has also been criticized for successive stimulus plans and low interest rates, which flooded the market with cheap funds and pushed up asset prices.

“This is not only because of the government’s stimulus measures, but also because of increased liquidity, we are seeing increasingly serious financial imbalances such as asset bubbles. It is time to cancel the expansionary policy,” said Taeyoon Sung, a professor of economics at Yonsei University.

Despite these concerns, Ann does not rule out the possibility of a further increase in the debt ratio to allow investment in areas identified as growth drivers such as non-memory chips, electric vehicle batteries and biopharmaceutical products.

“The pandemic has accelerated the transition to a digital low-carbon economy.” He said. “As a small open economy that is sensitive to environmental changes, we should respond quickly to changes.”

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