In light of growing concerns about the nation’s fiscal soundness amid the coronavirus pandemic, South Korea should take a leaf from Germany’s debt-brake law to stabilize its debt ratio, a think tank here said Wednesday.

Asia’s fourth-largest economy’s debt-to-gross domestic product ratio has so far shown moderate growth, but it could surge rapidly under the current circumstances, a report released by the Korea Economic Research Institute said.

The debt-to-GDP ratio was 27.5 percent in 2007, 29.7 percent in 2010 and 35.9 percent in 2018, showing “relatively moderate growth.” This was due to Korea’s ability to keep its primary budget balance in positive terrain, except during the 2008 financial crisis. The primary budget balance is the fiscal balance excluding net interest payments on consolidated government liabilities.

But the primary budget balance has declined rapidly in recent years, shedding 2.2 percentage points on-year to 0.7 percent in 2019. The corresponding figure stood at 2.9 percent in 2018.

This pushed up the debt-to-GDP ratio by 2.2 percentage points in the same period, to 38.1 percent.

Now, with the budget balance forecast to plummet and the debt-to-GDP ratio projected to escalate in view of the pandemic, Korea is at a crossroads and has to choose whether it wants to follow Germany’s path to budget surplus or Japan’s path of deficit.

Germany has been able to maintain a primary budget surplus after hitting a deficit of minus 2.3 percent in 2010, while its debt-to-GDP ratio declined by 21.1 percent over seven years to 69.3 percent in 2019.

Meanwhile, Japan has experienced a budget deficit for more than a decade, with the figures coming in at minus 2.7 percent in 2007, minus 8.7 percent in 2010 and minus 2.5 percent in 2019. Its debt-to-GDP ratio grew from 154.3 percent in 2007 to 225.3 percent last year.

“We must follow Germany’s path by making efforts to cut back on fiscal spending such as setting a limit to our debt-to-GDP ratio and legalizing measures that could bring about balance,” said the head of KERI’s economic policy team, Choo Kwang-ho.

“Efforts to establish a healthy corporate environment such as overhaul of regulations and adoption of labor flexibility is crucial as well,” he added.

Germany’s constitutional mechanism restricts the country’s debt levels, helping it stand out as the only Group of Seven member with a budget surplus coupled with a relatively low debt burden.

So far this year Korea has passed three extra budgets worth some 60 trillion won ($49.7 billion) combined, in a bid to minimize the economic fallout from the virus, prompting concerns from experts that this could deal a hefty blow to the nation’s fiscal health.

By Jung Min-kyung (mkjung@heraldcorp.com)