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Advanced countries around the world are going all out to lower chronic deficits and high national debts. But Korea is going in the opposite direction. The ledgers of this government have red marked all over it. This is how things have been for the past four years.
The national budget marked a surplus during just the first year of President Roh Moo-hyun's term in 2003. The size of the fiscal deficit has grown each year from W4 trillion (US$1=W941) in 2004 to a projected W14.8 trillion this year.
But the government is not concerned. Rather than cutting the size of the debt, the government has been hiring more public servants, drastically raising social welfare spending and creating more expenditures on a massive scale by pursuing mega-projects such as the relocation of the nation's administrative capital and balanced regional development. As a result, during 1994 to 2005, the growth in Korea's fiscal spending averaged 11.36 percent per year, more than twice the OECD average of 4.99 percent, placing Korea in first place in this category.
The problem is that our economic growth rate is standing still, while growth in government spending has outpaced it. Kwak Eun-kyoung, a researcher at the Center for Free Enterprise, says Korea's average GDP growth rate from 2003 to 2005 was 5.64 percent, but fiscal spending grew by 11.13 percent, leading to Korea's highest difference ever between GDP growth and fiscal spending growth.
Sovereign debt has also snowballed. The national debt, which was W133 trillion in 2002, is expected to rise to more than W300 trillion this year. During the five-year term of this administration, sovereign debt has grown 17.9 percent each year. Sovereign debt is expected to account for 33.4 percent of Korea's GDP this year, compared to 19.5 percent in 2002.
Moreover, Korea's future is anything but rosy when it comes to sovereign debt. As the nation's economic growth potential weakened, tax revenues have decreased, while social welfare expenditures due to an aging society, as well as other unproductive spending areas such as balanced regional development, have increased.
The size of hidden debt is also serious. The W300 trillion sovereign debt does not include debt owed by public institutions, the national pension and private sector investments, which will become future debt for the nation. Rep. Lee Hahn-koo of the Grand National Party estimates Korea's total debt at around W1,500 trillion.
As a result, experts warn that Korea faces a serious fiscal crisis unless the government quickly embarks on a program to shave its debt.
Yi In-sill, a professor at the School of Economics at Sogang University, says president-elect Lee Myung-bak's campaign pledge to reduce fiscal spending by 10 percent is taking things in the right direction. Excess money left over from the budget at the end of the year should be used to repay Korea's sovereign debt, the expert says, while implementing a more transparent system in government policy so that budget allocations could become more visible and efficient.
Prof. Ock Dong-suk at Incheon University says the new government could be tempted to issue sovereign bonds or turn to state-run companies as the new administration boldly pursues various new projects. But Ock adds that major projects, including the construction of the proposed Grand Canal, must be undertaken within the boundaries of fiscal discipline.
(englishnews@chosun.com )
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