With the government emphasizing the 'active role of finance' in its budget preparation guidelines for next year and shifting its fiscal policy stance, there is growing interest in funding sources. The government is considering restructuring 'mandatory expenditures' as a key option, but the possibility of implementation remains uncertain as many changes would require amendments to existing laws. Unlike discretionary expenditures, which refer to business-related budgets, mandatory expenditures are legally mandated budgets, such as the basic pension or grant-in-aid for educational finance.
◇ Active management of 'sound finance' emphasized during Yoon's government
In the 'Direction for Preparing the Budget for 2026' announced by the Ministry of Economy and Finance on the 25th, it was stated that 'an active role of finance is required for economic recovery, enhancing industrial competitiveness, and supporting social structural reforms.'
This marks a significant shift from the approach since the Yoon Suk-yeol administration took office. In its first year in 2022, the Yoon administration declared a shift in fiscal policy from 'expansion' to 'sound' at the fiscal strategy meeting and stressed the 'establishment' of sound finance in the budget preparation guidelines for 2025.
However, the phrase 'sound finance' has disappeared from next year's budget plan. Instead, the lower-tier concept of 'sustainability of finance' was mentioned and has been pushed to a less priority position. A Ministry of Economy and Finance official noted, 'While in the past, we emphasized short-term 'sound finance,' we now mean to consider long-term 'sustainability of finance.'
Following this year’s economic downturn, coupled with a decline in exports that had been sustaining South Korea’s economy, criticisms arose that the government should not rigidly insist on 'sound finance.' The government also accepted the demand that 'finance should play a role as a catalyst.'
The government is set to spend boldly where it can next year, but there lies a significant concern that the financial capacity may not be sufficient. The uncertainty in economic recovery raises doubts about whether revenue conditions will improve. The Ministry of Economy and Finance only stated, 'We will strengthen the effectiveness of tax expenditure management by reorganizing tax exemptions and reductions and will ensure thorough taxation of unreported income and overdue taxes,' without presenting any concrete revenue securing measures.
In this context, the scale of legally defined mandatory expenditures is ballooning, significantly narrowing the margins for discretionary expenditure operations. The proportion of mandatory expenditures will continue to rise from 52.9% last year to 55.6% in 2026 and 57.3% in 2028. Furthermore, according to the 'National Fiscal Management Plan' for 2024-2028, while the scale of discretionary expenditures is projected to increase to 313 trillion won, 318 trillion won, and 323 trillion won from 2026 to 2028, the scale of mandatory expenditures is expected to rise sharply to 391 trillion won, 413 trillion won, and 433 trillion won.
◇ Plans to overhaul 'mandatory expenditures', but legislative amendments expected as hurdles
As a result, the government has indicated the possibility of a major overhaul of 'mandatory expenditures' this time. The Ministry of Economy and Finance diagnosed that 'As the proportion of mandatory expenditures continues to grow, it has become unavoidable to allocate most of future fiscal capacity to cover these expenditures,' adding that 'The demand for welfare spending such as pensions and medical care, coupled with increasing interest burdens on government bonds due to the entry into an ultra-aged society, is expected to further inflate mandatory expenditure needs.' Items like pension structural reform, basic pension, and educational finance grant-in-aid are being discussed as potential mandatory expenditure items.
It is also a repeated suggestion from the Committee on Fiscal Management Strategy, which advises the government on fiscal operations, that not only should discretionary expenditures be targeted, but restructuring of mandatory expenditures must also be actively carried out. A member of the Committee on Fiscal Management Strategy stated to ChosunBiz, 'The current method targeting only 'discretionary expenditures' needs to change,' recalling that during the global financial crisis, countries like Ireland and the Netherlands redefined their spending on labor costs, pensions, and social security systems.
While the budget authorities are claiming to capture both 'an active role of finance' and 'enhanced sustainability' next year, fiscal experts raise questions about the feasibility. Lee Kang-gu, a research fellow at the Korea Development Institute (KDI), remarked that 'particularly, mandatory expenditures are matters for legislative changes,' stating that 'There is agreement that restructuring is necessary due to demographic changes, but it will certainly not be easy. The key will be whether agreements can be reached not only within the National Assembly but also with the Ministry of the Interior and Safety, the Ministry of Education, and local governments.'
He noted that while the active role of finance is emphasized in this budget preparation guideline, it is ambiguous to consider it as a sweeping fiscal policy shift sufficient to overcome an economic crisis. The research fellow pointed out that 'Given the significant political uncertainty at present, it seems challenging for the Ministry of Economy and Finance to assert clearly what posture to adopt in preparing next year’s budget.'