🚨 730 Trillion Won Expansionary Budget Era
Today Korean Economic News for Beginners | 2025.08.26
0️⃣ Lee Jae-myung Government's First Budget Plan, National Bond Issuance Exceeds 200 Trillion Won, Raising Fiscal Soundness Concerns
📌 "Spend Money Where Needed" Expansionary Budget Policy, Increase AI and Welfare While Cutting Conventional Spending
💬 The government has entered a full-scale expansionary budget era by confirming next year's total spending at around 730 trillion won. As the first budget plan since the launch of the Lee Jae-myung government, it presents a "selective focus" strategy of boldly increasing budgets for future investments and public welfare such as AI, R&D, and welfare while significantly cutting unnecessary conventional spending. Record-level investments will be made in expanding child allowances, expanding health insurance benefits, and building AI infrastructure. However, concerns about fiscal soundness are growing as national bond issuance to fund this exceeds 200 trillion won for the first time in history, and national debt is expected to surpass 1,300 trillion won. Economic experts are calling for careful fiscal management, saying "there will be short-term economic stimulus effects, but long-term fiscal burdens could be excessive."
1️⃣ Easy Understanding
The government has announced it will spend a huge amount of 730 trillion won next year. This is the largest amount in our country's budget history, showing the new government's determination to "spend money boldly where needed."
It may be hard to imagine how big 730 trillion won is. Since Korea's annual GDP is about 2,400 trillion won, this means the government will spend one-third of that money. For a family of four, if their monthly living expenses are 4 million won, think of it as the government using about 1.3 million won of that for various purposes.
This budget has two main features. First, it greatly increases "investment for the future." Record budgets will be invested in artificial intelligence (AI) research and development, and active support will be provided for developing advanced technologies like semiconductors and biotechnology. Just like building a strong foundation when constructing a house, this focuses on creating a foundation that will allow Korea to maintain competitiveness 10-20 years from now.
Second, it promises to "reduce the burden of living costs for ordinary people." Child allowances will be expanded to reduce the burden on families raising children, and health insurance will provide partial support for nursing home care costs. Also, basic pensions will be increased to help stabilize the lives of elderly people. This means the government will partially bear the essential expenses of households.
But where will the money come from to spend this much? Since taxes alone are not enough, the government must borrow money by issuing "national bonds." National bonds are simply "IOUs" issued by the government. It's a promise saying "we will borrow money and definitely pay it back with interest later."
The problem is that this national bond issuance exceeds 200 trillion won for the first time this year. The government's total debt, called "national debt," is also expected to exceed 1,300 trillion won. For individuals, this is similar to having loans that keep increasing.
In the end, this budget is like a double-edged sword policy with the intention of "let's invest and support now to revive the economy and prepare for the future," but debt will also increase accordingly.
2️⃣ Economic Terms
📕 Expansionary Budget
Expansionary budget is a fiscal policy where the government increases spending to stimulate the economy.
- It's a method of energizing the economy by reducing taxes or increasing government spending.
- It's mainly used when the economy is in recession, expecting job creation and increased consumption effects.
- The opposite concept is "contractionary budget," which makes finances healthier by reducing spending and increasing taxes.
📕 National Bonds
National bonds are bonds issued by the government to raise needed funds.
- They are certificates where the government promises to pay back principal and interest after a certain period while borrowing money from investors.
- Since they're issued by the country, they have high safety and are classified as "risk-free assets."
- However, if too many are issued, it can negatively affect the country's credit rating.
📕 National Debt
National debt is the total of all debts that the central government must bear.
- It includes national bonds, borrowed money, and national treasury debt commitments.
- It's an important indicator for judging a country's fiscal soundness by its ratio to GDP.
- Korea's national debt ratio is about 54%, which is better than the OECD average (70%).
📕 Fiscal Soundness
Fiscal soundness is a concept showing how healthy the government's financial management is.
- It comprehensively evaluates the balance between government income (taxes, etc.) and spending, national debt levels, etc.
- If fiscal soundness worsens, the country's credit rating falls and interest rate pressures increase.
- In the long term, it can lead to tax increases or welfare reductions, increasing the burden on citizens.
3️⃣ Principles and Economic Outlook
✅ Economic Effects and Mechanisms of Expansionary Budget
Let's analyze the specific impact that the 730 trillion won expansionary budget will have on the economy.
First, economic growth through multiplier effects is expected. When the government spends 1 won, a larger effect appears in the actual economy, called the "multiplier effect." For example, when the government builds roads, construction companies earn money, and these companies buy materials and pay wages to employees, spreading consumption. According to the Korea Development Institute (KDI), Korea's fiscal multiplier is 0.8-1.2, so spending 100 trillion won can expect an 80-120 trillion won GDP increase effect. Especially, AI and R&D investments can become long-term growth engines by increasing productivity through technological innovation.
Second, it directly helps increase household income and consumption recovery. Expanding child allowances and health insurance benefits has the effect of reducing households' essential expenses. For example, if child allowances increase by 100,000 won per month, it means an increase of 1.2 million won in disposable income per year for a family of four. This can contribute to activating the domestic economy by leading to higher household savings rates or other consumption. Especially, lower-income families tend to use most of their additional income for consumption, so consumption stimulation effects are expected to be large.
Third, strengthening future growth potential through long-term competitiveness is key. Large-scale investments in AI, semiconductors, and biotechnology are preemptive investments for competitiveness 5-10 years from now rather than immediate economic stimulus. Just like the US concentrated investments in internet infrastructure and IT technology in the 1990s to lead the digital economy in the 2000s, this can be seen as Korea's strategic choice to seize leadership in next-generation industries. If these investments succeed, they will lead to long-term tax revenue increases and job creation, helping improve fiscal soundness.
Expansionary budget is a strategic choice trying to catch two rabbits: short-term stimulus effects and building long-term growth foundations.
✅ Impact and Risks of Large-Scale National Bond Issuance
Let's look at the impact that issuing 200 trillion won in national bonds will have on financial markets and the overall economy.
First, pressure for long-term interest rate increases may grow due to the surge in national bond supply. When the government issues a huge amount of 200 trillion won in national bonds in one year, supply in the bond market increases significantly. When supply exceeds demand, prices fall, and when bond prices fall, yields (interest rates) rise. In fact, when the US expanded finances on a large scale after COVID-19, 10-year treasury rates soared from the 1% range to the 4% range. If long-term interest rates rise in Korea too, it could burden the private sector by leading to increases in mortgage rates and corporate loan rates.
Second, there's a possibility that private investment could shrink due to crowding-out effects. When the government borrows large amounts of money from the money market, private companies may find it difficult to raise funds. Especially if interest rates rise, companies' investment appetite may decline, which could negatively affect economic growth in the long term. However, considering Korea's currently high household savings rate and abundant bank liquidity, crowding-out effects are expected to be limited in the short term. The Bank of Korea can also supply liquidity through monetary policy when necessary, so rapid interest rate increases are expected to be suppressed.
Third, concerns about national credit ratings and fiscal sustainability may arise. When national debt exceeds 1,300 trillion won, the national debt-to-GDP ratio is expected to exceed 54%. This is still lower than the OECD average (70%), but the fast pace of increase is concerning. International credit rating agencies will closely monitor fiscal deficit expansion and debt increase pace, and if continuous deficits continue, pressure for credit rating downgrades could increase. However, Korea's solid economic fundamentals and sufficient foreign exchange reserves are positive factors.
Large-scale national bond issuance enhances fiscal policy effects while also carrying challenges of financial stability and fiscal sustainability.
✅ Long-term Fiscal Outlook and Policy Tasks
Let's analyze the long-term impact if expansionary budget continues and necessary policy responses.
First, strategies to recover fiscal soundness through tax revenue increases and spending efficiency improvements are needed. For expansionary budget to succeed, the money spent must actually lead to economic growth and tax revenue increases, not just spending a lot of money. If AI and R&D investments connect to new industry creation and high-value-added jobs, corporate and income tax revenues will increase. Also, improving welfare spending efficiency so support is concentrated where truly needed is important. The government should present a medium-term plan to return fiscal balance within 3-5 years to dispel market concerns.
Second, long-term fiscal planning in preparation for population aging and pension spending increases is urgent. The current expansionary budget is problematic, but the bigger concern is the aging that will continue for 20-30 years. National pension spending will start increasing rapidly from 2030, and health insurance spending will also continue to increase. In this situation, if finances are expanded from now, future generations' burdens could become excessive. Therefore, securing long-term fiscal sustainability through pension reform, medical cost efficiency, and tax system reform is important.
Third, creating a virtuous cycle structure between economic growth rates and fiscal policy is key. For expansionary budget to succeed, invested money must actually lead to economic growth. Especially, investments in AI and advanced technology fields must create new industries and jobs, which then connect to tax revenue increases in a virtuous cycle structure. In a situation where Korea's potential growth rate has fallen to the 2% range, if expansionary budget can raise this to the 3% range, fiscal soundness concerns could naturally be resolved. For this, structural reforms such as deregulation, labor market reform, and education innovation must also be promoted together.
The success of expansionary budget depends on structural innovation and productivity improvement of the economy, not simple spending expansion.
4️⃣ In Conclusion
The 730 trillion won expansionary budget is a bold policy chosen by the Lee Jae-myung government to recover the economy and secure future competitiveness. While short-term household burden relief and economic stimulus effects are expected, side effects such as rapid increases in national debt and worsening fiscal soundness must also be considered.
The biggest meaning of this budget is strategic investment through "selective focus." The direction of boldly investing in truly necessary areas like AI, R&D, and welfare while reducing unnecessary conventional spending is desirable. Especially, large-scale investment in future food industries can be seen as an essential choice for Korea not to fall behind in global technology competition.
Strengthening welfare such as expanding child allowances and health insurance benefits is also necessary policy in the era of low birth rates and aging. Reducing households' essential spending burdens can increase consumption capacity, which can lead to domestic economy activation.
However, concerns about fiscal soundness cannot be ignored either. National bond issuance exceeding 200 trillion won and national debt surpassing 1,300 trillion won is unprecedented. Side effects such as interest rate increases, private investment shrinkage, and national credit rating downgrades may also appear.
Most importantly, whether such large-scale investments actually lead to economic growth and tax revenue increases is the key point. Rather than simply spending money, that money must create new industries and jobs and increase productivity to contribute to long-term fiscal soundness improvement.
In the future, the government should present a clear roadmap through medium-term fiscal plans showing when fiscal balance will be restored. Also, flexibility is needed to closely monitor investment effects and boldly modify policies if expected results don't appear.
In the end, the success or failure of this expansionary budget depends not on "how much money is spent" but on "how effectively it is spent." Balancing short-term stimulus and long-term growth, welfare expansion and fiscal soundness well will be the new government's most important task.
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