The Lee Jae-myung administration forecasts that national debt will increase by nearly 500 trillion won over the next four years, raising concerns about the sustainability of public finances. According to the '2025-2029 Mid-term Fiscal Management Plan' released by the Lee Jae-myung administration on the 29th, government debt is projected to rise from 1,302 trillion won (based on the second supplementary budget) this year to 1,789 trillion won by 2029.
Government debt is growing at a steeper rate than the pace of economic growth, and the ratio of government debt to gross domestic product (GDP), which was 49.1% this year, is expected to reach 58% by 2029. If this trend continues, by 2030, when the Lee Jae-myung administration's term ends, the size of government debt could approach 2,000 trillion won, and the government debt ratio to GDP will exceed 60%.
Despite growing concerns about the deterioration of fiscal soundness, fiscal authorities have reacted saying, "It's fine." They emphasize an optimistic view that by concentrating investments on promising growth projects, the results will drive national economic growth, improving the country's finances. This is in stark contrast to last year's approach, which focused on 'sound finances' and a 'tight budget plan.'
◇ Total expenditure expands while revenue lags... deficit entrenched
The government has prepared a total expenditure of 728 trillion won in next year's budget. This is an increase of 8.1% from this year's main budget of 673.3 trillion won. The growth rate of this year's main budget was 2.5%.
In contrast, the growth rate of total revenue in next year's budget is only 3.5% (compared to the main budget). Even when based on the second supplementary budget, which included revenue adjustments, it stands at 4.95%.
With low revenue and skyrocketing expenditure, the fiscal deficit worsens. The Ministry of Economy and Finance projects that the consolidated fiscal balance without social security fund will record a deficit of 109 trillion won next year, up from a deficit of 73.9 trillion won this year.
The deficit ratio relative to GDP is expected to rise from 2.8% this year to 4% next year. This ratio is expected to surpass 4% until 2029, according to the Ministry of Economy and Finance. The fiscal rule set by the ministry, aiming for a consolidated fiscal balance without social security fund deficit ratio within 3% of GDP, has effectively been discarded.
The issue is that even these grim forecasts for the consolidated fiscal balance without social security fund reflect the positive circuit of fiscal authorities managing the growth rate of discretionary expenditures at a low level.
According to the mid-term fiscal expenditure plan released by the Ministry of Economy and Finance, while the government managed the growth rate of mandatory expenditure at 6.3%, lower than the total expenditure growth rate (8.1%), discretionary expenditure rose by 10.28%.
Due to low birth rates and an aging population, mandatory expenditure in Korea is expected to increase by an average of 6.3% per year. The Lee Jae-myung administration stated that it will maintain the existing level for mandatory expenditure growth, but the growth rate for discretionary expenditure will be managed at a low level of 2-3% starting from 2027. Considering that this year's inflation rate forecast is 2.0%, this means that from next year, discretionary expenditure will only increase by the amount of inflation.
If the plan is managed at a level that maintains existing projects without starting new ones, while this fiscal management plan is not impossible, it is pointed out that it will realistically be difficult considering the pile-up of national agendas.
In fact, the Moon Jae-in administration, which pursued an expansionary fiscal policy like this government, maintained a total expenditure growth rate of 9% after setting the increase rate of the total expenditure in the initial year of its term at 7.1% in the 2018 main budget.
Kim Woo-cheol, a professor of taxation at the University of Seoul, said, "The growth rate of discretionary expenditure in next year's budget exceeds 10%, so who would trust that it will be managed at a level of 2-3%, which is the inflation rate level from the following year?" He added, "Based on the mid-term fiscal management plan, it seems likely that the national fiscal situation will worsen further."
As Professor Kim pointed out, if the growth rate of discretionary expenditure exceeds planned levels, the scale of national debt will increase further. This will ultimately leave a burden for future generations.
◇ Increasing national debt... forecasts for government debt rise further
As spending exceeds earnings, government debt accumulates steeply every year. The government predicted the size of government debt to be 1,273 trillion won when preparing this year's budget last year. However, as a result of increasing fiscal expenditure through the second supplementary budget in July, the size of government debt was expanded to 1,302 trillion won.
The government forecasts that the size of Korea's government debt will increase to 1,415.2 trillion won next year, 1,532.5 trillion won by 2027, 1,664.3 trillion won in 2028, and 1,788.9 trillion won by 2029. This means that approximately 110 trillion to 130 trillion won of national debt is added every year. The increase in government debt over four years amounts to 515.6 trillion won.
The ratio of government debt to GDP is also expected to rise from 48.1% to 58% during the same period. The government had set a target last year to keep the government debt ratio at around 50% in the '2024-2028 National Fiscal Management Plan.'
At that time, the government also set a goal to manage the debt ratio to GDP within 50%. However, this debt management goal has disappeared in the new administration. As a result, government debt has surged, and the burden of interest on government bonds has also increased. The interest on government bonds reflected in next year's budget is 30.1 trillion won.
What is the appropriate level for the ratio of government debt to GDP for Korea, which is not a reserve currency country? In response to this question, Yoo Byeong-seo, the budget chief at the Ministry of Economy and Finance, said, "It's difficult to specify a particular number," adding, "What is more important is how to construct this system well by actively managing fiscal operations when necessary, and paying down debt when not required."
The government stated, "We will secure a virtuous cycle of economic growth and finance through performance-based fiscal management." Deputy Prime Minister and Minister of Economy and Finance Ku Yun-cheol noted, "The previous administration tried to secure fiscal soundness by lowering the growth rate of expenditure, but this resulted in a vicious cycle where the growth rate fell short of the potential growth rate, reducing the revenue base." He stressed that the tight budget weakened the foundation for national growth.
However, as expenditure continues while the revenue base remains weak, controversy surrounding the speed and sustainability of government debt growth is inevitable.
Professor Kim Woo-cheol stated, "Looking at the mid-term fiscal management plan, it seems to take for granted an operation of deficit finances reaching 120 trillion won annually," adding that "we must be vigilant regarding deficit finances and prepare for a decline in national creditworthiness and the macroeconomic shocks that follow."
In contrast, Professor Lee Jung-hee from Chung-Ang University said, "It is true the proportion of national debt to GDP is increasing, but fiscal spending is inevitable in crisis situations." She added, "However, it is important to use it effectively and achieve results. It is inappropriate to forgo necessary expenditures due to debt concerns."
Emeritus Professor Kim Jong-sik from Yonsei University pointed out, "Currently, while the ratio of government debt is at a tolerable level compared to international standards, aging and low growth may deteriorate the fiscal soundness as the revenue base weakens." He emphasized that revitalizing corporate investment to boost growth rates is the long-term solution.