A new study has found that when public debt increases, households tend to anticipate higher future prices and accelerate their spending. The findings suggest the government should clearly communicate its public debt management plans to the public, as the nation's fiscal conditions can stimulate inflation expectations.
According to the Bank of Korea's (BOK) Economic Research Institute on Wednesday, a paper titled "The Impact of Fiscal News on Household Expectations and Consumption," co-authored by Professor Shim Myungkyu of Yonsei University's Department of Economics, was published as a National Bureau of Economic Research (NBER) working paper. The study tracked how fiscal information affects economic perceptions and actual spending among 11,262 Korean households.
The study found that information about public debt simultaneously raises household inflation expectations and consumption. Analysis of actual credit card transaction data linked to surveys showed 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 are interpreted as households perceiving rising public debt as a signal of future inflation and accelerating purchases before prices climb further. This contradicts the conventional theory that households view public debt as a future tax burden and reduce spending accordingly.
Reactions to fiscal deficit news, however, were different. Households expected lower economic growth when presented with information about widening deficits, but this did not translate into actual changes in spending. While public debt information triggered sensitive responses in price and interest rate expectations, fiscal deficit information primarily influenced macroeconomic outlooks such as growth rates. This suggests households perceive the two indicators through distinct channels.
"Public debt and fiscal deficits are connected concepts, but household perceptions are asymmetric," a Korean economics scholar said. "With the national debt ratio approaching 50%, fiscal communication can stimulate inflation expectations and translate into actual price pressures. It is urgent to establish strict management frameworks, including the adoption of fiscal rules."