Workshop Paper on Auditing
the Public Debt Control System
Challenges and Improvements Regarding the Government Debt Control
System Based on the BAI Report
October 2014
The Board of Audit and Inspection of Korea
Contents
I. Brief introduction to the Korean Government Debt Control System
1. Current status of government debt / 2
2. Government debt control system / 3
II. Overview of Audit cases
1. Background / 4
2. Audit objectives and viewpoints / 5
3. Methods of audit / 5
III. Results of the Audit
1. Inadequate monitoring system of government debt / 6
2. Improper guidelines to measure the amount of government debt / 10
3. Improper appropriating responding assets for financial debt / 12
4. Inadequacy targeting the amount of issued bonds / 14
5. Inadequate using tax surplus to reduce government debt / 15
6. Unreasonable standards for calculating issue limit of local government bond
/15
1
I. Brief Introduction to Korean Government Debt
1. Current Status of Government Debt
Korean government debt reached near 420.5 trillion KRW(around 395 billion
USD) in 2011, with the debt to GDP ratio reaching 33.8%. It is said that the
Korean debt to GDP ratio is much more stable than that of the average OECD
countries. The speed of growth has been rapid, but it has been increasingly
abating as of recently.
Major states of OECD’s debt to GDP ratio
States
US
UK
France
German
Japan
Korea
Average
(%)
102.7
97.9
100.1
87.2
205.5
34.0
103.0
However, the government debt has increased by 286.7 trillion KRW from 2002
to 2013. The annual increasing rate of government debt is 12.2%, though the
annual average of economic growth in last ten years has only been at 5.6%. The
repayment for principal and interest of government debt reached 28.3% of fiscal
year revenue, and fiscal experts point out that based on the current situation,
exceeding 30% is very risky.
A low birth rate and an increased life expectancy of the population have resulted
in a decrease in fiscal revenue and an increase in government debt due to welfare
expenditure. This is called a structured low growth. In this situation it will be
difficult to achieve stabilization of government debt.
* Estimate of Life Expectancy Rate in Korea
11.0%(2010) → 15.7%(2020) → 24.3%(2030) → 37.4%(2050)
* Estimate of Welfare Expenditure (% of GDP)
9.8%(2010) → 12.0%(2020) → 15.2%(2030) → 18.4%(2040) → 20.1%(2045) →
21.6%(2050)
* Course of potential GDP growth (Source: OECD)
4.4%(2001~2007) → 3.4%(2012~2017) → 2.4%(2018~2030) → 1.0%(2030~2050)
2
2. Government Debt Control System
The Korean government debt control system is too complex to manage. Though
the Ministry of Strategy and Finance (MOSF) is a competent Ministry to oversee
the government debt, the responsibility and accountability in managing the
government debt is dispersed among several government departments. MOSF
regulates the central government debt, Ministry of Security and Public
Administration (MOSPA) for local government debt, and the Ministry of
education (MOE) oversees the debt of local education offices.
The supervisory system regarding fiscal integrity is similar to that of the
government debt control system. MOSF supervises the central government, stateowned companies and non-profit public institutions. The MOSPA oversees the
local governments, local public enterprises and local non-profit public
institutions.
Also, the system of management of public funds 1 are distributed amongst
several departments. For example, MOSF is the authority in charge of the
Exchange equalization fund, while the National housing fund is managed by the
Ministry of Land, Infrastructure and Transport (MOLIT).
Range of Management of the Government Debt
Public sector
Government
Central
Government
States-owned companies
Local
Non-profit
Government
Non-financial
Financial
Non-profit
* The colored sections should be added to government debt management according to the
International Advisory
1
Public funds are raised by loan-payable and government bonds issued by central government. There
are Employment insurance fund, National pension fund, Scientific and technological rising fund, Exchange
equalization fund and National housing fund etc.
3
II. Audit Abstract
1. Background
MOSF concluded that the government debt of Korea is sustainable and stable.
After the 2008 global financial crisis, the government tightened public
expenditure and have gathered more tax revenues. In fact, the austerity budget
improved the fiscal integrity much better. In earlier 2012, international creditrating agencies such as Moodies, Fitch, and S&P increased the Korean credit
level based on Korea’s improved fiscal sustainability.
Debt to GDP ratio : 30.1%(2008) → 34.0%(2011) → 33.3%(2012)
However, when potential government debt is considered, taking an optimistic
view about government debt can prove to be dangerous. First, the range of
controlled government debt is too narrow, when compared with other OECD
countries. As a result, if the corporate debt of state-owned companies’ are not
strictly limited, they can easily become government debt.
S&P warned that there is an uprising in the debt of states-owned companies, and in November
2012 S&P devaluated the credit level of states-owned companies, such as K-Land & Housing,
K-water and K-expressway co., ltd.
In addition, the quality of government debt is declining. Deficit debt, which has
to be paid using national tax money has surged up to 206.9 trillion KRW in the
last 10 years. On the other hand, financial debt, which could be paid by
responding assets, has been stable. For financial debt, assets and liabilities are
appropriated simultaneously, resulting in what can be construed as selfrepayment. However, if the deficit debt is not paid off using national tax money,
it can be passed on to future generations.
Deficit debt ratio of government debt
32.2%(43.1 trillion KRW) → 49.2%(206.9 trillion KRW) → 51.2%(245.2 trillion KRW)
4
2. Audit Objectives and Viewpoints
The objectives of the audit were to enhance the effectiveness of the government
debt policies by examining if there were cases of improper management and if
there are institutions to be improved on in regards to controlling government debt.
The audit focuses on the following four main points:
1) The monitoring of government debt
2) The operation of the government debt control system
3) The government’s efforts toward reducing government debt
4) Issuing local government bonds
3. Methods of the Audit
Audit was conducted using the following procedures:
Examining potential problems of the current government debt control
system by documents or computerized data (IT cross-checking).
Conducting on-site inspections and interviewing members in charge of
controlling government debt. The on-site inspections were carried out in
partnership with the central and local governments, public agencies and stateowned companies.
Calculating the proportion of the improperly used budget and searching for
causes of the illegal or unfair usage in actual cases.
Suggest alternatives to prevent recurrence of similar cases and to upgrade
the efficiency of the government debt control system.
5
III. Results of Audit
1. Inadequate monitoring system of government debt
1) Narrow range of government debt management
The quality of government debt should be assessed by not only the current
amount of debt but also the potential fiscal burden that may occur. Financial
insolvency of public agencies and local government can damage the soundness of
government debt. In addition, there is a high possibility that even private sector
debt like household-liabilities can create a negative impact on government debt.
In Greece fiscal crisis incurred by insolvency of Public Sector, but In Spain caused by realestate bubble of private sector.
Moreover, IMF, World Bank, OECD and international credit rating agencies
recommended considering the whole public sector’s financial status to evaluate
the quality of Government Debt.
The IMF advised recently to consider the total public sector net liabilities, which includes the
debt of government and state-owned companies.
However, based on the National Fiscal Act, the definition of government debt is
too narrow, including only confirmed monetary debt, such as issued bonds. In
case of the government guarantee, the guarantee obligations are not included
with government debt except in terms of confirmed payments by the government.
As a result, the national pension, government guarantees and public assurance,
which can become a future fiscal burden, are not controlled.
Budget accounts or public funds, which are not managed by the Ministry are
excluded from the scope of government debt. Also, the debt of public agencies,
state-owned companies, local governments and even some national agencies are
not included in government debt.
6
2) The Balloon-Effect of Debt
A Balloon-Effect occurs between a government and non-government area. The
increase in ratio of non-government debt has been greater than that of
government debt, since 2008. The debt of public agencies and state-owned
companies has grown from 294 trillion KRW in 2008 to 463 trillion KRW in
2011. Additionally, the debt of local government-owned companies has increased
from 32 trillion KRW to 49 trillion KRW in the same period of time.
The debt of state-owned companies, such as K-Land & Housing’s debt had
increased from 135 trillion KRW in 2008 to 244 trillion KRW in 2011. During
this period, MOLIT had conducted many SOC projects along with a Housing
policy program by issuing corporate bonds to K-Land & Housing. K-water
issued around seven trillion KRW corporate bonds in 2009 to complete Four
Major Rivers Restoration Project, which cost 22 trillion won. Both K-Land &
Housing and K-water are MOLIT’s affiliated organizations.
Average Annual Growth Rate of Debt (2008~2011)
Sector
(%)
Government (scope of National Fiscal Act)
8.0
Public agencies (Includes state-owned and public agencies)
12.0
Local government-owned companies
11.2
State-owned government should compensate for loss
15.9
When including the debt of state-owned companies, the total amount of debt in
the public sector reached 1470 trillion KRW. Debt to GDP ratio increased to
118.9%, and it is higher than the OECD’s average at 103.0%.
The Balloon-Effect between debt clauses was also founded. Fiscal loans have
been gradually changed to credit guarantees to use the budget more efficiently.
Accordingly, several credit warrant funds, which are not included as government
debt, increased sharply. For example, Korea Credit (technology) Guarantee
7
Fund’s Warranty estimated liabilities had increased by four times from 2007 to
2011 due to sharp increased Guarantee balance.
Current situation of Credit guarantee in Korea
(unit: trillion KRW)
2007
2008
2009
2010
2011
Guarantee Balance
401,630
443,366
640,580
647,589
628,022
Insolvency Guarantee
(ratio)
17,099
(4.3)
23,015
(5.2)
24,595
(3.8)
26,332
(4.1)
27,639
(4.4)
Estimated Liabilities
3,673
5,751
5,775
7,816
14,315
Government Contributions
3,300
2,500
27,000
-
-
3) Inaccurate Statistics of Government Debt
The IMF, OECD and World Bank have set the Public Debt Statistics Database
to better grasp the public sector’s net liabilities in the world. The IMF advised to
manage government debt by calculating net liabilities, which setoff the internal
transaction of public agencies. However, MOSF did not have any affiliated
organization to control the current net liabilities. MOSF did not create a control
system, which could monitor the whole public sector’s current net liabilities to
evaluate the potential size of the fiscal burden. Therefore, it was impossible to
calculate the exact statistics of the net liabilities.
The IMF requested references of net liabilities to MOSF through the Bank of
Korea (BOK) on December, 2011. However, it was impossible for MOSF to
obtain the correct numerical value of the net liabilities for BOK. Eventually,
BOK submitted the sum liabilities data, not the net liabilities, to the IMF on May,
2012. The exaggerated figure for public debt figure brought the debt to GDP ratio
to be 2% higher than the previous official announcement.
8
Improvements of Public Sector Net Liabilities Monitoring System
State-owned c om panies
Non-profit institutions(Local)
Local Government
Non-profit institutions(Central)
Central Government
Debt
securities
Loan
Conferred Debt
Unpaid
Account,
BTL etc.
Pension,
Insurance,
Warranty.
Commercial
Credit
Estimated
Debt
The current government debt management range (on National Fiscal Act)
Additional range by improvements of Government Debt statistics
Total Public sector management range (IMF advice)
Additionally, the Seoul Metropolitan Government omitted 2 trillion KRW in
bonds, which had been issued by the local government. That amount of bonds
was accounted for by the Seoul Metro (Urban Railway Corporation).
< Recommendations >
The BAI recommended the Ministry of Strategy and Finance
① To establish an improved monitoring system to figure out the debt of the
public sector to stabilize fiscal management
② To enhance reliability of statistics on government debt by accepting
international standards and correcting the statistics of local government debt
9
2. Improper guidelines to measure the amount of government debt
1) Different range of management for each guideline
There are two different government guidelines to measure government debt –
①‘Government
Debt Managing Plan’ and
②‘Fiscal
Statistics Revising Plan’.
Both plans were established by the MOSF. Nevertheless, these two plans are
different from each other in regards to the scope of government debt
On the ‘Government Debt Managing Plan’, the range of government debt was
limited to confirmed debt, which the central government was required by law to
repay. However, the ‘Fiscal Statistics Revising Plan’, which the MOSF arranged,
was based on GFSM 2001 and included not only the fixed debt of the central
government, but that of the local governments and non-profit agencies, as well.
Accordingly, Calculating the aggregate amount of government debt in
accordance with different two guidelines can create confusion.
2) Guarantee and contingency liabilities
The Pension Fund and the Assurance Fund were controlled partly by the ‘Public
Fund Managing Long-term Plan,’ a supplement for the ‘Government Debt
Managing Plan’. However, even with the ‘Public Fund Managing Long-term
Plan’, public guarantee funds are excluded from the target.
The Range of Government Debt Management of Each Guideline
Confirmed
debt
Estimated
debt
Central Government
O
non-profit agencies
X
pension, insurance
O
O
guarantee
X
X
‘Government Debt
Managing Plan’
10
‘Public Fund Managing
Long-term Plan’
Status of Funds in Operation
Pension Funds
National Pension, Public Officials Pension, Teachers Pension, Soldiers
Pension
Insurance Funds
Employment Insurance, Trade Insurance,
Industrial accident compensation Insurance
Guarantee Funds
Credit Guarantee Fund, Technology Credit Guarantee Fund,
Credit Guarantee Fund for Peasant, Fisherman,
Housing Financial Credit Guarantee Fund,
Infrastructure Credit Guarantee Fund
Contingency liabilities, especially, were not supervised, despite specific clauses
of the central government’s pecuniary responsibility by Acts. The ‘National
Guarantee Debt Managing Plan’ in accordance with the ‘National fiscal Act’
only takes care of the government’s direct guarantee apart from the contingency
liabilities, though the compensation for loss
2
enacted on the public
agencies’(including state-owned companies) establishment law. Recently, the
annual rate of increase is around 24.8% for public guarantees, but the potential
fiscal burden regarding this has not yet been figured out.
In addition, the contingency liabilities, which can be aroused by BTO(Build–
Transfer–Operation) Project’s MRG(Minimum Revenue Guarantee) clauses, or
political actions, such as ‘Four Major Rivers Restoration Project’ have not been
analyzed thoroughly.
The National Policy Meditation Committee approved to support K-water for the interest costs
(around 2.5 trillion KRW) in corporate bond until 2016.
2
State-owned companies or public funds, which have ‘compensation for loss’ clause: Korea Land &
Housing Corporation, Korea Housing Finance Corporation, Korea Policy Finance Corporation, Small &
Medium Business Corporation, The Export-Import Bank of Korea, Korea Trade Insurance Corporation,
Credit Guarantee Fund and the Technology Credit Guarantee Fund
11
< Recommendations >
The BAI recommended the Ministry of Strategy and Finance
To revise ‘Government Debt Managing Plan’, ‘Long-term Fund Managing Plan’
and ‘National Guarantee Debt Managing Plan’ for checking the blind spot of
government debt
3. Improper accounting responding assets of financial liabilities
MOSF had controlled ‘current status of financial liabilities and responding
assets’ since 2008. MOSF asserted that there is no problem about financial debt,
because responding assets is sufficient for reimbursement. The excess amount of
responding assets for financial liabilities was 13.4 trillion KRW.
current status of financial liabilities and responding assets
(unit: trillion KRW)
Financial liabilities (A) Counterpart asset (B) Excessed asset (B-A)
2011
213.6
227.0
13.4
2010
199.0
210.3
11.3
2009
190.9
209.6
18.7
2008
176.4
191.0
14.6
In accordance with ‘Government Debt Managing Plan’, controlling the
responding assets should be done securely for regulating financial liabilities. To
get the amount of responding assets accurately, the range of responding assets
and valuation basis should be consistent between budget accounts(or funds).
However MOSF accounted extraneous assets for financial liabilities.
Furthermore the range or valuation basis is irrational, and different between
budget accounts(or funds).
12
For example,
① National housing fund : Accounting responding assets which is raised by
not government debt but people’s charges.
② Special account for building innovation city : Only remaining assets should
be accounted as responding asset, but all assets are accounted
(unit: trillion KRW)
government
debt
responding
asset
note
national Housing Fund
48.9
73.4
accounting assets that should
not be accounted
special account for
building innovation city
0.2
3.7
accounting assets that
is not existed
BAI audited seven major accounting(or funds) 3 , founded that responding
assets was over accounted than financial liabilities around 22 trillion KRW in
2011.
Results of re-estimating for seven major accounts(or funds)’s responding assets
(unit: trillion KRW)
2011
financial
liabilities(A)
responding
assets
re-estimated
responding assets(B)
more or less
(A-B)
213.6
227.0
191.2
- 22.3
< Recommendations >
The BAI recommended the Ministry of Strategy and Finance
To make a unified standard to figure out exact amount of responding assets in
all accounts(or funds)
3
Foreign exchange equalization fund, National housing fund, Patriots and Veterans fund, Special
account for building innovation city, Special account for relocating base of US Armed Forces in Korea,
Public money management fund.
13
4. Inadequacy targeting about the amount of issued bonds
‘Government Debt Managing Plan’, which predict debt to GDP ratio over the
next 5 years and arrange the plan of reducing government debt, is submitted to
National Assembly every year by MOSF. Setting the rational target area of debt
to GDP ratio and strictly managing the debt on the basis of the ‘Government
Debt Managing Plan’ is very important to control government debt.
However MOSF predict the increased amount of debt low deliberately without
any reasonable grounds. Especially in case of ‘Foreign exchange equalization
fund’ MOSF predict after two year government debt very low, and next year
revise the number higher than previous year to make it easier to achieve the goal.
Changes in the Government Debt Plan
(unit: trillion KRW)
the amount of issued bonds for
the balance of issued bonds for
stabilizing the foreign exchange market stabilizing the foreign exchange market
t+2(A)
t+1(B)
difference(A-B)
2011
t+2(A)
t+1(B)
difference(A-B)
136.1
138.4
△2.3
2012
16.2
19.2
△3.0
154.5
156.8
△2.3
2013
36.3
40.3
△4.0
170.8
173.7
△2.9
Note: Variable “t” is plan year
As a result, the credibility and fiscal discipline function of MOSF’s
‘Government Debt Managing Plan’ were seriously damaged
< Recommendations >
The BAI recommended the Minister of Strategy and Finance
To reinforce the fiscal discipline of ‘National debt management plan’ and set the
reasonable targeting when revising the ‘National debt management plan’ about
‘Foreign Exchange Equalization Fund’
14
5. Inadequate using tax surplus about reducing government debt
Since 2008 the amount of tax surplus have been increased. Total revenues of
government’s general account consist of tax revenue, non-tax revenue and
issuing bonds. Accordingly, MOSF can reduce the amount of government debt by
using tax surplus.
tax surplus : 1.6 trillion KRW (2002~2006) → 4.6 (2008) → 5.1 (2011)
However, net issuance of bonds had increased despite the increased tax surplus.
In 2011, MOSF predicted that tax surplus reached to 4~5 trillion KRW, but the
amount of issued bonds did not decrease. As a result, the size of decreasing
government debt was reduced.
< Recommendations >
The BAI recommended the Minister of Strategy and Finance
To minimize revenue underestimation error and adjust the plan of issuing
Government Debt by reflecting internal revenue performance.
6. Unreasonable standard for calculating Issue limit of local government bond
Issue limit of local government bond restricted by debt to budget ratio and the
amount of local government’s general revenues. MOSPA, the ministry that
control local government debt, deliberately make the debt to budget ratio higher
and the amount of general revenues smaller to issue more local government bond
‘Local government financial accounting standard’ enacted by MOSPA regulates
that the rent related with BTL(Build-Transfer-Lease) projects should be
accounted as a liability. However MOSPA had not counted the rent which
15
reached to 3.5 trillion KRW, while calculating debt to budget ratio.
MOSPA summed up total amount of fiscal accountings to calculate debt to
budget ratio without eliminating internal transaction between budget accounts.
The amount of internal transactions reached to around 8% of local governments’
one year budget in 2010. Accordingly, the issue limit of local government bond
was raised with such an error. Especially, Ulsan-city’s issue limit was increased
by 143.8 billion KRW.
On Local Fiscal Act, issue limit of bond could not be exceeded to 10% of the
local’s general revenue. Local government’s general revenue consists of local tax
revenue, general grants, adjustment grants, fiscal compensation, current non-tax
revenue, and temporary non-tax revenue. In case of temporary non-tax revenue,
it should be removed to calculate general revenue, because of its severe volatility.
However MOSPA had not exempted that, and bond issue limit was increased
about 3.5 trillion KRW.
< Recommendations >
The BAI recommended the Minister of Security and Public Administration
To revise standard for calculating issue limit of local government bond to
decrease bond issuance.
16