🚨 National Debt to Hit 58% of GDP
Today Korean Economic News for Beginners | 2025.08.30
0️⃣ Annual 100 Trillion Won Deficit Inevitable Until 2029, Double-Edged Sword of Expansionary Fiscal Policy
📌 Government's 5-Year Fiscal Plan Confirmed: Spending Growth Rate 5.5% vs Revenue Growth Rate 4.3%... National Debt Ratio Approaching Record High
💬 The government confirmed its 2025-2029 National Fiscal Management Plan, announcing plans to increase fiscal spending by an average of 5.5% annually over the next five years. Meanwhile, revenue growth is only expected at 4.3%, making annual fiscal deficits of over 100 trillion won inevitable. As a result, national debt is projected to increase to 1,788.9 trillion won by 2029, reaching 58.0% of GDP. The government cited aging population, increased welfare demands, and the need for AI and innovation industry investments as reasons for maintaining expansionary fiscal policy, while also pursuing spending restructuring and revenue base expansion. Experts analyze that finding a balance between fiscal soundness concerns and economic stimulus needs is the key challenge.
1️⃣ Easy to Understand
The government announced it will spend more money over the next five years, which means national debt will grow significantly. It's like a household where living expenses keep rising, but salary increases are smaller, creating monthly deficits.
Let me explain how the government's finances work. The government earns money through taxes and other revenues, and spends it on welfare, defense, education, and infrastructure construction. When spending exceeds income, there's a deficit, and the government borrows money by issuing government bonds to cover the shortfall.
Looking at this five-year plan, spending will increase by 5.5% annually while revenue only grows by 4.3%. The 1.2 percentage point difference may seem small, but in absolute amounts, it's huge. For example, if total spending is 600 trillion won this year, it would become about 780 trillion won in five years, but revenue won't keep up, requiring over 100 trillion won in borrowing each year.
The government has several reasons for increasing spending. First, welfare spending increases due to aging population. As the elderly population grows, spending on pensions, medical expenses, and long-term care automatically increases. Second, investment for economic stimulus. The government needs to expand investment in future industries like AI, semiconductors, and biotechnology for economic growth.
However, the problem is that tax revenue alone cannot cover this spending increase. Raising taxes significantly could burden citizens and businesses, potentially dampening economic activity. But reducing spending is also difficult because welfare spending directly affects people's lives, and cutting future investments could harm long-term growth.
This is why the national debt ratio will rise to 58% of GDP. This means the country owes debt equivalent to more than half of the entire economic size. While still lower than the OECD average (around 70%), the rapid increase rate is concerning.
Ultimately, the government faces the difficult task of finding a balance between stimulating the economy and investing in the future, while maintaining fiscal responsibility.
2️⃣ Economic Terms
📕 National Fiscal Management Plan
The National Fiscal Management Plan is a blueprint showing how the government will collect and spend money over the next five years.
- It's a legally required plan submitted to the National Assembly annually, showing fiscal policy direction.
- It includes revenue, expenditure, and national debt projections to manage fiscal soundness.
- While revised annually based on economic changes, it provides the basic framework for medium-term fiscal management.
📕 Managed Fiscal Balance
Managed fiscal balance is a key indicator showing the government's actual fiscal situation.
- It's calculated by subtracting expenditure from total revenue, with negative numbers meaning deficit.
- It includes only general and special accounts, excluding social security funds like the National Pension.
- Expressed as a percentage of GDP, exceeding -3% is generally considered a red flag for fiscal soundness.
📕 National Debt Ratio
National debt ratio is the proportion of national debt to economic size, a key indicator of fiscal soundness.
- Calculated by dividing all central and local government debt by GDP.
- Higher ratios can lower national credit ratings and increase borrowing costs.
- The OECD average is around 70%, and research suggests exceeding 90% negatively affects economic growth.
📕 Expansionary Fiscal Policy
Expansionary fiscal policy involves increasing government spending or reducing taxes to stimulate the economy.
- Used when the economy is stagnant or growth rates are low to stimulate demand.
- Has short-term economic activation effects but risks long-term national debt increases.
- The opposite of contractionary fiscal policy, adjusted based on economic conditions.
3️⃣ Principles and Economic Outlook
✅ Economic Effects and Risk Factors of Expansionary Fiscal Policy
Let's analyze the complex impacts of the government's expansionary fiscal policy on the economy.
First, short-term economic stimulus effects are expected. When the government increases spending, that money flows to businesses and individuals, stimulating consumption and investment. For example, if the government invests 100 trillion won in infrastructure construction, construction company revenues increase, employee incomes rise, leading to consumption in other sectors - creating a "multiplier effect." Investment in future industries like AI, biotechnology, and semiconductors can create new growth drivers and build long-term growth foundations. Major countries successfully led economic recovery through large-scale fiscal spending during the 2008 global financial crisis.
Second, fiscal soundness deterioration due to increased national debt is concerning. While the 2029 national debt ratio of 58% isn't at dangerous levels yet, the increase rate is problematic. Rising from 36.7% in 2019 to over 20 percentage points in 10 years is very rapid. Excessively high debt ratios can lower national credit ratings and increase government bond interest rates, raising borrowing costs. This ultimately increases interest payment burdens, pressuring other policy budgets in a vicious cycle. The risk of following the path of fiscal crises experienced by Greece and Italy cannot be ruled out.
Third, the problem of burden transfer between generations is serious. Current increasing national debt is ultimately debt that future generations must repay. This means today's 20-30 year olds will have to repay this debt through higher taxes when they're 40-50 years old. Moreover, due to aging, the future will see a shrinking working-age population and growing elderly population to support, further increasing generational burdens. This could significantly increase young generations' economic burden, reducing their consumption capacity and undermining long-term growth potential.
To maximize the effects of expansionary fiscal policy, improving spending efficiency and productivity is most important.
✅ Changes in Fiscal Spending Structure and Priorities
Let's examine the specific direction of government spending and its long-term impacts.
First, rapid increase in welfare spending is a major cause of fiscal pressure. Basic pension, medical expenses, and long-term care insurance related to aging are increasing by over 10% annually. As of 2025, welfare budget accounts for over 35% of the total budget, and this proportion will continue growing. Such spending has strong "mandatory spending" characteristics, making it difficult to reduce. However, improvements like increasing welfare system efficiency and preventing duplicate payments are possible. For example, focusing basic pension (currently given regardless of income level) on lower-income groups could reduce fiscal burden while enhancing welfare effects.
Second, strategic investment in future industries is key to securing growth drivers. Government concentrated investment in AI, biotechnology, and advanced materials isn't just spending but investment in creating future tax bases. Just as Samsung and SK Hynix achieve massive export performance through semiconductors, initial government R&D investment can lead to global competitiveness. Investment responding to megatrends like digital transformation, carbon neutrality, and demographic changes is expected to lead to long-term tax revenue increases, contributing to fiscal soundness improvement. However, performance evaluation and feedback systems must be strengthened to improve investment efficiency.
Third, restructuring existing projects and rationalizing budget allocation is urgent. Among annually increasing budgets, many projects have questionable effectiveness. Similar overlapping projects should be consolidated, and poorly performing projects should be boldly discontinued through "zero-base budgeting." Clear role division between central and local governments, and between government and public enterprises is needed to prevent budget waste. For example, infrastructure investment could transition to private investment-inducing methods (PPP, private investment projects) to reduce government burden while expanding necessary facilities.
Without qualitative improvement in fiscal spending, sustainable growth cannot be achieved through simple quantitative expansion alone.
✅ Revenue Expansion and Fiscal Soundness Recovery Plans
Let's analyze revenue base expansion plans to support increasing spending and their feasibility.
First, tax system rationalization for revenue expansion is necessary. Korea's tax burden ratio is lower than the OECD average, leaving room for revenue expansion. However, rather than simply raising tax rates, improving tax equity and preventing tax avoidance is important. For example, increasing effective tax rates for high-income earners and large corporations, and strengthening taxation on underground and digital economies could minimize tax resistance while increasing revenue. New taxes like carbon tax and digital tax could simultaneously achieve environmental protection and revenue expansion.
Second, natural revenue increase through economic growth is the most desirable method. When government investment leads to economic growth, corporate profits increase, boosting corporate tax revenue, and employment growth increases income tax revenue. Active consumption also increases value-added tax revenue. Creating this virtuous cycle requires qualitative growth through productivity improvement and innovation. Particularly, Korea has a solid manufacturing foundation, so growth potential can be enhanced through manufacturing advancement using 4th industrial revolution technologies and high-value service industry development.
Third, utilizing state assets and diversifying non-tax revenue sources is also an important means. Efficient utilization of government-owned land and buildings can secure additional revenue. For example, long-term leasing of idle state land in urban areas to private sector for rental income, or expanding development gain recovery measures. Improving returns of public pension funds like National Pension and civil servant pensions to ensure long-term fiscal stability is also important. Such diversified approaches can expand government revenue without increasing tax burden.
Revenue expansion is more effective through long-term approaches via economic structure improvement and institutional innovation rather than short-term prescriptions.
4️⃣ In Conclusion
The government's 2025-2029 fiscal plan is an attempt to find balance between realistic needs and long-term sustainability, but still faces many challenges. Annual deficits exceeding 100 trillion won and national debt ratio surpassing 58% are figures that cannot be taken lightly.
The necessity of expansionary fiscal policy itself is hard to deny. Increased welfare demand due to aging is an unavoidable reality, and investment in future industries cannot be postponed in the 4th industrial revolution era. Particularly, initial government investment in AI, semiconductors, and biotechnology sectors is likely to lead to securing national competitiveness and expanding tax bases in the long term.
However, the structure where spending growth rate (5.5%) consistently exceeds revenue growth rate (4.3%) is clearly problematic. If this trend continues, the national debt ratio surpassing the OECD average is just a matter of time, which could significantly reduce fiscal policy flexibility.
Most important is improving fiscal spending efficiency. It's not just about spending more money, but where and how it's spent that's crucial. Welfare spending should focus on those who really need it through careful beneficiary selection, and future investment should concentrate on areas with proven effectiveness through strengthened performance evaluation.
Revenue expansion measures should also focus on natural tax revenue increase through economic growth rather than simple tax increases. Government investment actually leading to innovation and productivity improvement to grow the overall economic pie is the most desirable direction.
From the perspective of young professionals, this fiscal plan directly relates to future tax burden. Current national debt increase is ultimately debt that future generations must repay, so how efficiently the government uses this money will determine future quality of life.
Ultimately, the success of this fiscal plan depends on whether investment through expansionary fiscal policy actually leads to economic growth and innovation, enabling long-term fiscal soundness recovery. The government needs to pay more attention to qualitative improvement of spending, not just quantitative expansion.
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