Surviving the fall

By Park Sang-Yeop

The neologism ``fiscal cliff” has become an international topic of conversation. The phrase is indicative of the potential danger within U.S. government debt. While European countries were still recovering from the economic shock of their government debt, America began facing this latest financial meltdown.

In the past, economic crises were usually caused by conflicts between nations, natural disasters and malfunctions of the private sector. But these days government debt has become a major cause.

In spite of this global trend, it seems that most of us think Korea is safe. There were many controversial issues discussed in the recent presidential election, but nobody seems to be concerned about government debt. Inversely, it looked like the majority of us were only interested in increasing government expenditure. No candidate advertised a practical way in which they would secure a budget, and no voter asked questions related to this.

Actually, the debt level of Korea is not that high yet. In 2011, Korea ranked 30th in the central government debt (percentage in gross domestic product) among the 34 OECD countries. At the time when the Greek government bond downgraded to junk bond status, the government debt of Greece was 144.9 percent, while that of Korea was 33.6 percent in 2011. Some people might ask, ``What’s the big deal?” But it might still become a big deal.

There is an inevitable factor that enables us to expect the increase of the Korean government debt: The proportion of old people in the population is dramatically increasing. It will only take 19 years before Korea becomes an ``aged society,” which means that 14 percent of the population is over 65, as opposed to an ``aging society,” which means that 7 percent of the population is over 65. The rate is approximately four times as fast as that of America and six times that of France.

The aging population in Korea is caused not only by rising life expectancies, but also a low fertility rate; the fertility rate of Korea is ranked 219th among the 224 countries in the CIA’s World Factbook 2012. It means that the number of people paying taxes is decreasing, while the number of people who spend taxes ― social security expenditure, national pension and national health insurance ― is increasing. Naturally, the result of this situation will continue to worsen Korea’s national finances.

The government debt level is very closely related to the impact of the global economic crises to the national economy. Korea has successfully overcome some recent global economic crises. One of the reasons Korea was safe in those global economic crises was that the nation has a low level of government debt. So the big three credit-rating agencies evaluated Korea as a kind of a low-risk country.

The Korean capital market is small and highly accessible to foreigners, so it’s very susceptible to unexpected withdrawals of foreign capital. If the Korean government debt had expanded like Spain, Greece or Japan, those international economic crises would have driven Korea into a disaster.

Nobody thinks that a small country with heavy debts is a place where their money can stay safely. And that’s the reason why we should at the least keep the level of government debt low.

It’s not too late. We should recognize the reality that government expenditure is going to expand and that tax income is going to shrink. And we have no choice but try to reduce or, at

least, maintain government debt. The only way to get over this situation is to pay more taxes and receive fewer social welfare benefits.

Some people might ask, ``Why should we give up social welfare among the many government expenditures?” The answer is that social welfare is the main cause of the rising government expenditure, and it is generally irreversible. Reduction of social welfare usually touches off severe resistance from people. Those changes will definitely be a great pain for us, but there is no easy way.

Each and every Korean is in charge of this problem. We mustn’t be tempted by the sweet delusion of limitless complimentary government expenditures. We should keep in mind the core lesson of Economics: There is no such thing as a free lunch.

The writer is a student majoring in business administration Yonsei University. He can be reached at diskline.0729@gmail.com.