The government said, "If it does not carefully utilize resources, (financial) risks will continue to rise."
Morris Obstfeld, senior fellow at the Peterson Institute for International Economics, assessed the expansionary fiscal policy of the Lee Jae-myung government on the 3rd at the '2025 G20 Global Financial Stability Conference' held at the Plaza Hotel in Sogong-dong, Seoul. The G20 Global Financial Stability Conference is an event co-hosted by the Ministry of Economy and Finance and the Korea Development Institute (KDI), marking its 11th year this year.
Obstfeld, who delivered the keynote address at the conference, is a former chief economist at the International Monetary Fund (IMF). He noted, "South Korea's national debt, relative to its Gross Domestic Product (GDP), is at a very healthy level," but pointed out that "financial support for the elderly will continue to increase due to rapid aging."
Next year's budget basis government debt is 1,415.2 trillion won, which is 51.6% of GDP. The government debt in the United States is 100% of GDP, and Japan's has long exceeded 200%.
Obstfeld said, "The European Union (EU) is increasing defense spending, and South Korea will also do the same," adding that "when these factors combine, global interest rates will inevitably continue to rise." He emphasized, "The South Korean government will find itself in a situation where it has to bear more interest," stating that "just because the current situation is stable doesn't mean there are no risk factors, so a cautious approach is necessary."
However, Obstfeld noted, "A deficit is not always a bad thing," explaining that "if additional fiscal expenditures are used to enhance productivity, it will definitely have positive effects." He added that "if President Lee Jae-myung increases economic growth through the structural reforms recently announced, the sustainability of finances can also improve," stressing that "the critical issue is whether resources are being used effectively."
Regarding the recent South Korea-U.S. negotiations that lowered the reciprocal tariff rate from 25% to 15%, he said, "This was achieved in a difficult situation," expressing concerns that "the United States may introduce new demands at the negotiating table." He further stated, "South Korea's negotiators will do their best, but the situation is expected to be very challenging."
At the conference, not only Korea but also global government debt was discussed. Randall Henning, a professor at American University, noted, "3.3 billion people live in countries that spend more on interest than on healthcare," and that "2.1 billion people live in countries that pay more in interest than on education." Professor Henning stated, "While these countries have not declared a default, it is no different from a 'developmental default' for failing to develop properly."
Professor Henning stated, "There is also Malthusianism in finance," indicating that "while the financial market or debt grows exponentially, the institutional capacity to manage it increases arithmetically." He emphasized, "We must be prepared for this pessimistic view and, if necessary, restructure the debt."
Lee Hyung-il, first vice minister of the Ministry of Economy and Finance, who attended the conference, noted, "With high interest rates persisting, the vulnerability of debt in developing countries is deepening, which may act as a factor in international financial market volatility," adding that "efforts on an international scale, such as the G20 joint framework, must continue."