A new study has found that rising public debt tends to prompt households to accelerate spending in anticipation of future price increases. Researchers argue that the government needs to more clearly communicate its public debt management plans and fiscal policy direction, as perceptions of fiscal conditions can stimulate inflation expectations.
According to the Bank of Korea's (BOK) Economic Research Institute, a paper co-authored by Professor Shim Myungkyu of Yonsei University's Department of Economics, titled "The Effects of Fiscal News on Household Expectations and Consumption," has been published as a working paper by the National Bureau of Economic Research (NBER). The study tracked the impact of fiscal information on economic perceptions and actual spending among 11,262 Korean households.
The findings showed that information about public debt simultaneously raised household inflation expectations and consumption. Notably, analysis of actual credit card transaction data linked to survey responses revealed that households expecting a 1 percentage point increase in the future public debt ratio raised their spending by approximately 0.4 percentage points over the following five months. The results suggest that households interpret rising public debt as a signal of future inflation and move up their spending before prices rise further. This contradicts the conventional theory that households view public debt as a future tax burden and cut spending accordingly.
Responses to fiscal deficit news, however, were different. When households encountered information about widening deficits, they expected future economic growth rates to decline, but this did not translate into actual changes in consumption. While public debt information triggered sensitive reactions in price and interest rate expectations, fiscal deficit information primarily affected macroeconomic outlooks such as growth rates, suggesting that households perceive the two indicators through distinct channels.
"Public debt and fiscal deficits are interconnected concepts, but household perceptions are asymmetric," an economist in Korea's academic community said. "With the national debt ratio approaching 50%, fiscal communication can stimulate inflation expectations and transmit into actual price pressures, making it urgent to establish a strict management framework such as the introduction of fiscal rules."
