During a press conference marking his first anniversary in office, the president described the idea of using surplus tax revenue to pay off national debt as "one of the foolish things." This sentiment has been reflected in the upcoming budget proposal. Next year, the national debt is set to increase by 106 trillion won, with 104 trillion won allocated to the future response fund without a designated purpose. Article 58 of the Constitution mandates that the issuance of national bonds requires prior approval from the National Assembly. This means that representatives of the people must verify where the shortfalls are before borrowing. Approving the issuance of bonds without a specified purpose is akin to signing a blank check. The question of whether paying off debt or borrowing to hold cash is foolish should be determined by the principles of finance, not by investors' calculations.
Paying off debt is a choice with a guaranteed return. If the government bond procurement rate is 4%, repaying 1 trillion won equates to earning 400 billion won annually without risk, management fees, or the need for someone to cover losses. Any return exceeding the bond rate carries inherent risks, and when those risks materialize, the losses fall on future taxpayers. Choosing to forgo a guaranteed 4% return in pursuit of an uncertain return above that cannot be deemed wise.
A more significant concern lies in fiscal capacity. National debt has nearly doubled from 729 trillion won in 2019 to 1,413 trillion won this year. Debt is typically incurred during difficult times, and the ability to borrow during such periods stems from having repaid debts in stable times. During the Asian financial crisis, our national debt ratio was around 11%. This capacity allowed us to mobilize 168 trillion won in public funds to stabilize the financial sector. Germany reduced its debt ratio from 82% in 2010 to 60% in 2019, enabling it to borrow 275 billion euros in 2020 to respond to the COVID-19 crisis. In the same year, we allocated 67 trillion won through four supplementary budgets, primarily funded by national bonds, with a debt ratio around 40%. If a similar crisis occurs after the debt ratio exceeds 50%, the market will demand higher interest rates, limiting our response options. Paying off even a portion of the debt now is not about tying up money; it is about securing the right to borrow more cheaply, more extensively, and more quickly in the next crisis, maximizing fiscal flexibility. If we do not secure this right during a year of record tax revenue, when will we?
The notion of borrowing to accumulate cash and covering interest with investment returns is not found in any textbook on public finance. In July of this year, the government bond procurement rate was 4.07%, while the target return for the proposed fund was 3.85%. From the outset, this represents a negative margin. Including management fees and operational costs, returns would need to exceed the mid-4% range just to break even, and to exceed that, one would have to invest in risky assets. This amounts to borrowing to take on risk. No global future fund has been established in this manner. Norway's sovereign wealth fund accumulates through oil revenues and does not invest a single penny in domestic assets, keeping budgetary expenditures within a real expected return of 3%. Chile's Economic and Social Stabilization Fund only accumulates funds after deducting bond repayment amounts from confirmed actual surpluses, managing them solely in safe assets like foreign bonds. Australia's future fund began with fiscal surpluses and proceeds from the sale of public enterprises. All three have accumulated surplus funds without propping up their domestic asset prices. If one were to seek examples of funds created through borrowing, Malaysia's state investment fund 1MDB (1Malaysia Development Berhad) comes to mind. This fund, which sought returns by raising money through government-guaranteed bonds, left behind national losses and criminal trials. The path our fund seems to be taking is closer to this than to Norway's model.
Risks do not end with returns. The government sets market rules, grants permits, and oversees operations. If the referee enters the game with 100 trillion won, the match is compromised. Article 13 of the Fund Act allows for the trading of securities, leaving other matters to presidential decree. There are no provisions preventing domestic asset investments, and it merely states that losses will be covered by reserves. The trajectory of this combination was demonstrated by Ireland. The Irish National Pension Reserve Fund, which had been exemplary in accumulating 1% of GDP annually, was directed by the finance minister to inject 20.6 billion euros into two domestic banks during the financial crisis, only to see its valuation halve two years later. Funds without rules quickly become political coffers in times of crisis.
The greatest concern is that this money will be used to prop up stock prices. In the 1990s, the Japanese government attempted to support stock prices using public funds from postal savings and simple insurance. This so-called "price maintenance operation" failed to prevent the bubble from bursting and left a legacy of market distortion. The current allure of similar temptations is greater in our stock market, which is buoyed by a semiconductor boom. However, the funding for this fund represents debt that future generations will have to repay. When stock prices rise, the benefits accrue to the current generation holding shares, while when prices fall, the losses are covered by the taxes of the next generation, who do not own shares. Using public finances to maintain the price of specific assets is the most regressive form of redistribution. If the government embarks on stock price support using future generations' taxes to protect the current generation's investment profits, it will be recorded as the greatest fiscal blunder in South Korean history.
The choices made by fiscal authorities are truly perplexing. In a year when tax revenue increased by 49%, the very department responsible for maintaining fiscal integrity is leading the charge to incur debt at levels similar to those during deficits. Debt incurred at the peak of a boom will return as interest and principal the moment the boom ends, and at that time, the responsibility for this choice will be scrutinized in the records of financial statements and national audits. The department that has consistently cited fiscal soundness to curb spending during supplementary budget preparations must eventually explain to the public why it chose to increase debt during a period of unprecedented tax revenue. The demand for accountability does not end with individuals. Following a loss of trust in government projections, the UK established the Office for Budget Responsibility (OBR) in 2010, and Ireland created an independent fiscal advisory council in 2011 after experiencing fiscal collapse. Once it is confirmed that fiscal authorities cannot exercise restraint, society will demand politically neutral and independent fiscal institutions. This budget proposal will be remembered as an event that made it impossible for our society to delay the establishment of such an institution any longer.
During budget deliberations, the National Assembly must insist on three requirements. Accumulation should be based on confirmed surpluses, not debt. Management should be limited to government bonds and deposits, with investments in stocks and risky assets prohibited by law. Oversight should be entrusted to an independent body free from political influence, with records of accumulation, withdrawals, and management made publicly available at all times. A fund lacking these three elements is not savings for the future but a vault controlled by the current government. Paying off debt is not foolish. Signing off on bonds without a designated purpose during a year of surplus tax revenue is foolish, and chasing returns with that debt is not only foolish but dangerous. The National Assembly must reject that signature and demand a complete restructuring of the budget proposal. If this rejection does not occur now, the cost of that signature will be borne by the next generation.
* This article has been translated by AI.
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