The previous government tried to secure fiscal soundness by lowering the rate of increase in expenditure, but this led to a decline in the growth rate. We must not fall into a vicious cycle of passive fiscal management.
Former Deputy Prime Minister Koo made these remarks during a briefing on the '2026 budget proposal' held at the Government Sejong Center on the 28th, saying, "For future growth, we plan to increase next year's budget while significantly promoting expenditure restructuring." Koo stated that the budget direction aims to focus investments in high-growth areas, including artificial intelligence (AI), to drive economic growth. The following is a Q&A.
—The ratio of government debt to GDP is projected to rise from 48% in 2025 to 58% in 2029. Isn't that too steep a rise?
Koo Yun-cheol, Deputy Prime Minister said, "The previous government tried to secure fiscal soundness by lowering the rate of increase in expenditure, but only the potential growth rate and economic growth rate have declined. Passive fiscal management can weaken the revenue base by lowering the growth rate, ultimately triggering a vicious cycle that lowers potential growth rates."
We are currently in the era of the AI transformation. If Korea falls behind in physical AI, I believe there will be no future. Therefore, we plan to increase next year's budget while significantly pushing for expenditure restructuring. Moreover, we will focus investments in areas that can enhance growth potential to create a virtuous cycle that boosts economic growth and improves revenue conditions.
—The average annual increase rate of fiscal revenue is 4.3%, while the average annual increase rate of total expenditure is 5.5%. Is this structure of national finances sustainable? Which do you prioritize between expanding fiscal revenue and restructuring to lower the total expenditure increase rate?
Koo Yun-cheol said, "We aim to recover growth potential, increase Korea's economic growth rate, and create a structure where more revenue comes in. We intend to invest all our capabilities into this effort."
However, this alone is not enough. We must actively restructure expenditures for low-performing projects and focus our efforts on items that can increase potential growth rates in the medium to long term.
In this case, I see Korea having more potential in the AI transformation than any other country. If results start to emerge one by one, the country's potential growth rate and fiscal soundness can also be secured.
—Do you have plans for reforming the grant-in-aid (non-earmarked tax) and local education grant in the context of expenditure restructuring?
Koo Yun-cheol said, "There are no restructuring plans from the perspective of local extinction and improving the competitiveness of our education. Instead, as there are many demands for transferring more resources, we will focus on efficiently managing local government finance and educational finance to enhance productivity. If each department restructures its low-performing projects while enhancing central financial efficiency, the AI transformation in Korea will be possible. We will drive major innovations in Korea."
—What is the minimum threshold for the debt-to-GDP ratio in Korea as seen by the financial authorities?
Yoo Byeong-seo, Budget Head said, "It is difficult to specify a number. The current government, however, aims not to exceed 60%. But I believe it could exceed 60% due to aging and other factors. If fiscal management is needed, we will do it actively, and if not, it's important to figure out how to structure things well while paying it off."
—What is the estimated interest on government bonds expected this year? What is the projection for the next four years?
Jang Moon-seon, Director of Fiscal Policy, and Jo Yong-beom, Director of Budget Management said, "The current interest on government bonds is 30.1 trillion won. It is expected to increase to 36 trillion won in 2026 and 44 trillion won in 2029."
—The government debt has surpassed 1,400 trillion won for the first time in history. What are the countermeasures?
Jang Moon-seon said, "I expect it to be around 58% (in 2029), which is manageable. Considering that the advanced countries in the IMF are at 70-78% and the G20 is at 83%, we can adequately manage it given the size of our economy."
—You mentioned increasing expenditures on the premise of the success of the AI transformation. The likelihood of success is low, yet the deterioration of fiscal soundness is clear. What are your thoughts on that?
Yoo Byeong-seo said, "If the AI transformation fails, it won't just be a fiscal issue. Not investing would be a dereliction of duty."
—What is the proportion of mandatory spending in fiscal expenditures? What is the largest portion?
Jang Moon-seon said, "The proportion of mandatory spending in next year's fiscal expenditure is 53.3%, but it will rise to 55.8% in 2029. When the total expenditure increase rate is high, the proportion and increase rate of discretionary spending grow, and when the total expenditure increase rate is low, as in the previous government, the proportion and increase rate of mandatory spending increase. The largest share of mandatory spending comes from local grants."
—President Lee Jae-myung mentioned increasing defense spending during the Korea-U.S. summit, and the U.S. also asked Korea to raise defense spending to 5% of GDP. Next year's defense budget is set to increase by 8.2%. What percentage of GDP does this amount to? Is there a roadmap for expanding defense spending to about 5% of GDP?
Koo Yun-cheol said, "Next year's defense spending as a percentage of GDP is 2.42%. We plan to increase the defense budget in the medium to long term, but I cannot go into detail about matters currently under negotiation with the U.S. Additionally, we are focusing on improving productivity while increasing defense spending. If defense R&D, etc., can be utilized by the private sector, it is expected to boost our economic potential growth rate."
—The expected tax reduction amount in 2025 was 76.5 trillion won, but it has increased to 80.4 trillion won in 2026. Why has the reduction amount increased by 9 billion won annually, totaling 46 trillion won over five years?
Jo Man-hee, Director of Tax Policy said, "The details of tax reductions prepared in this year's tax reform proposal primarily concern corporate tax and income tax, and the reductions in those areas will be reflected in 2027."
Additionally, tax reductions were increased in the previous year's tax reform plan as part of measures against low birth rates and aging. The substantial expansion of the integrated investment tax credit appears to have led to an increase in the reduction amounts to be reflected in 2026.
Furthermore, health insurance premiums and national pension contributions will receive 100% income deduction, which means that if income increases, the reduction amounts will also increase.