Government Debt Is More Dangerous Than Household Debt

Korea’s debt debate has long been overly focused on the total volume of household debt. Yet the risk of debt is determined not simply by its size, but by controllability, deleveraging mechanisms, and who ultimately bears responsibility. By these criteria, household debt is largely manageable, while government debt—public liabilities and sovereign debt—is structurally difficult to control and reduce, making it the greater long-term threat.

Household lending is subject to the financial sector’s screening and prudential rules (income verification, credit assessment, DSR, etc.), and it contains built-in mechanisms for reduction through regular repayment. Even when risks materialize, shock absorbers such as debt restructuring programs exist.

Importantly, household debt risk does not lie in the aggregate average but is concentrated in vulnerable segments. Bank of Korea analysis shows higher delinquency rates among vulnerable borrowers, and delinquency is notably higher in the non-bank sector than in commercial banks. Accordingly, the key is not “fear of the total,” but targeted management centered on vulnerable borrowers and non-bank exposures.

Government debt expands primarily through the issuance of government bonds, while repayment responsibility is dispersed across the entire population and future generations. This weakens accountability and creates incentives for political and bureaucratic actors to expand spending while reducing incentives to consolidate. In addition, the automatic growth of mandatory spending and rising interest burdens make debt structurally difficult to reduce. As sovereign debt increases, interest payments increasingly crowd out fiscal space, locking the budget into a rigid trajectory.

The increase in government debt is not merely a larger number. It follows a weakening pathway: (1) higher interest costs → (2) greater fiscal rigidity driven by mandatory spending → (3) reduced room for growth- and innovation-oriented investment → (4) slower growth that weakens the denominator → (5) deterioration in debt ratios and national economic resilience. The claim of “debt-financed growth” can leave only debt behind if the productivity of spending is not secured.

In short, household debt is debt under which discipline operates through screening, regulation, repayment, and adjustment mechanisms. Government debt, by contrast, has weaker control devices, fragile reduction mechanisms, and an institutionalized tendency toward intergenerational burden shifting. Korea’s policy priority, therefore, should shift from anxiety over household debt totals to strengthening fiscal discipline and accountability in government debt management.

Policy implications can be summarized as:

1. enhancing the effectiveness of fiscal rules (minimizing exceptions and introducing automatic actions upon violations),

2. restructuring mandatory spending (curbing automatic expansion and assessing sustainability),

3. strengthening consolidated fiscal disclosure (including local governments, public enterprises, and contingent liabilities),

4. reinforcing performance-based budgeting (cutting low-impact spending and expanding sunset clauses), and

5. reducing state-directed finance while restoring price mechanisms to minimize distortions and balloon effects.

Table of Contents

I. Introduction: Redefining the True Target of “Debt Anxiety”

II. Household Debt: “Debt Under Discipline”

1. Current Status and Implications of Household Debt

2. Household Debt Under Dual Control: Market Discipline and Regulation

3. Household Debt Includes Built-in Deleveraging Mechanisms

4. The Core Risk Lies Not in the “Average,” but in Vulnerable Segments

III. Government Debt: Debt with “Weak Control Mechanisms” and “Medium-to-Long-Term Risks”

1. Current Status and Implications of Government Debt

2. Government Debt Begins as “Spending Without Repayment Responsibility”

3. Institutional Checks Exist, but Function Weakly in Practice

4. Government Debt Has Strong Upward Inertia

5. Risk Transmission Pathway: Fiscal Rigidity → Crowding Out Growth

IV. Manageable Household Debt vs. Government Debt: Fatal Under Control Failure

V. Conclusion: From “Household Debt Anxiety” to “Fiscal Discipline for Government Debt”

1. Policy Implications

2. Why Fiscal Discipline for Government Debt Matters More Than Household Debt

References

LINK: https://www.cfe.org/20260115_28487