🚨 728 Trillion Won Super Budget Reality
Today Korean Economic News for Beginners | 2025.09.01
0️⃣ Insufficient for Economic Stimulus, National Debt Surges
📌 "Largest ever" but real growth rate only 2.8%, fiscal soundness concerns grow with 110 trillion won deficit bond issuance
💬 The government announced it has set the 2026 budget at 728.9 trillion won. This is the largest ever, up 3.2% from the previous year, but the real growth rate considering inflation is only 2.8%, limiting economic stimulus effects. The R&D budget increased 4.8% to 32 trillion won, and AI sector received 1.5 trillion won (35% increase from last year), but the government must issue 110 trillion won in deficit bonds to cover insufficient tax revenue. The Ministry of Finance stated they "focused on securing future growth engines," but experts point out that "fundamental fiscal structure reform is urgent considering welfare spending increases due to aging population and rapid national debt growth."
1️⃣ Easy Understanding
The government announced it will spend 728 trillion won next year. While this sounds like a huge amount, analysis shows it's not enough to revive the economy.
Let's understand how big '728 trillion won' really is. This equals about 35% of Korea's annual GDP (Gross Domestic Product). To compare with a regular household, it's like a family earning 50 million won annually spending 17.5 million won per year. While it's a large amount in absolute terms, it's not that generous considering all the things the government needs to do.
The problem is how to get this money. Government income mainly comes from taxes, but when the economy is bad, corporate taxes from companies and income taxes from people decrease. Last year, tax collection was lower than expected due to semiconductor industry downturn and sharp decline in real estate transactions.
So the government has to borrow money to fill the gap. Next year, they plan to issue 110 trillion won in deficit bonds, which means the government is taking on 110 trillion won in new debt. This debt must be paid back later with taxes, so it ultimately becomes a burden on citizens.
The government emphasizes increased investment in future industries like research and development and artificial intelligence. However, it takes time for such investments to actually lead to economic growth. Experts point out that it's insufficient to revive the current difficult economy.
A bigger problem is population aging. As the population ages, welfare spending like pensions and medical costs increases every year. This is money that must be spent, not a choice, so there may come a situation where budgets in other areas need to be cut.
In the end, the government is in a situation where "we increased immediate spending, but we need more thought about how to handle the future."
2️⃣ Economic Terms
📕 Main Budget
Main budget is the official annual budget that the government gets approved by the National Assembly every year.
- It sets the limit on money the government can spend from January to December of the following year.
- If situations change during the year, supplementary budgets can be organized.
- It's finalized in early December after National Assembly review.
📕 Deficit Bonds
Deficit bonds are government bonds issued to cover shortfalls when government spending exceeds income.
- This is how the government borrows money, with interest that must be paid back later.
- The larger the issuance, the more national debt increases and the greater the burden on future generations.
- While necessary short-term for economic stimulus, excessive amounts worsen fiscal soundness.
📕 Real Growth Rate
Real growth rate shows actual increase after excluding inflation rate.
- Even if nominally increased by 3.2%, if inflation rises 2%, the real increase is only 1.2%.
- Real growth rate should be used when measuring actual purchasing power or economic effects.
- If real growth rate is low, the perceived effect may be minimal despite budget increases.
📕 Tax Burden Ratio
Tax burden ratio is the percentage of total taxes paid by citizens relative to GDP.
- The higher this ratio, the more taxes the government collects.
- OECD average is about 34%, while Korea is around 28%, relatively low.
- If tax burden ratio is low, government finances are more likely to become insufficient.
3️⃣ Principles and Economic Outlook
✅ Limits and Dilemmas of Expansionary Fiscal Policy
Let's examine the structural reasons why the government's significant budget increase will have limited real economic stimulus effects.
First, real spending increase is minimal when considering inflation. While nominally increased by 3.2%, excluding inflation rate of 2.4%, the real increase is only 0.8%. This is hardly the level for active fiscal policy for economic stimulus. During the 2008 global financial crisis, real growth rate exceeded 7%, and during COVID-19 it was maintained above 5%. Current levels can only provide defensive effects to prevent economic recession.
Second, discretionary spending capacity is rapidly shrinking due to mandatory spending increases. Mandatory spending including welfare and interest payments now exceeds 65% of the total budget. With basic pensions and health insurance spending increasing annually due to aging population, plus growing interest burden from increased national debt, the budget the government can use for policy purposes is actually shrinking. This kind of fiscal rigidity was one reason Japan fell into long-term stagnation in the 1990s.
Third, concerns about sustainability are growing due to weakening revenue base. Corporate tax income is declining due to poor business performance, and income tax growth is slowing due to employment difficulties. Real estate-related tax revenue decreased significantly due to sharp transaction declines. Increasing only spending in this situation risks structuralizing fiscal deficits. Considering Korea's tax burden ratio is 6 percentage points lower than OECD average, it's time to consider revenue enhancement measures in the long term.
To enhance expansionary fiscal effects, spending increases must be accompanied by revenue enhancement and spending structure adjustments.
✅ Future Investment vs. Realistic Limitations
Let's realistically analyze the effects and limitations of R&D and AI investments emphasized by the government.
First, R&D investment is a long-term growth engine but has limited immediate economic stimulus effects. While the government announced increasing R&D budget to 32 trillion won and investing 1.5 trillion won in AI, it usually takes 5-10 years for such investments to actually lead to economic growth. Basic research takes even longer. In current difficult economic situations, more immediate policies might be more important. For example, cash payments to boost consumption or SME financial support could be more effective short-term.
Second, investment efficiency and performance measurement systems are lacking. Government R&D budgets have continuously increased, but there haven't been many cases leading to actual results. Particularly in AI, with large technology gaps compared to US and China and insufficient private investment, government investment alone has limitations. More important is ecosystem creation through deregulation and private investment attraction, but consideration of these aspects is relatively lacking. Simply increasing budgets without performance evaluation and restructuring of existing R&D projects could increase inefficiency.
Third, selection and focus are needed to secure advantages in global competition. With limited resources, it's difficult to support all fields. Strategy is needed to focus on areas where competitiveness already exists like semiconductors, batteries, and bio, or select specific areas that could become next-generation industries for concentrated investment. Countries like Singapore and Israel achieved great results despite small scale through selection and focus, which should be referenced.
Future investment is necessary, but strategic approaches considering realistic constraints are important.
✅ Fiscal Soundness and Sustainability Concerns
Let's diagnose the sustainability of fiscal policy amid rapidly increasing national debt and aging pressures.
First, national debt growth rate continuously exceeds GDP growth rate. This year's national debt is expected to exceed 54% of GDP, and with additional 110 trillion won deficit bonds, it will approach 57% next year. While lower than OECD average (71%), the growth speed is problematic. Particularly with welfare spending surging due to aging population, if this trend continues, it's likely to exceed 70% of GDP in the 2030s. If national debt problems become serious like Japan or Greece, economic growth itself becomes difficult.
Second, structural fiscal pressure from aging is beginning in earnest. As baby boomers retire, pension recipients are rapidly increasing, and medical spending is rising steeply. Meanwhile, working-age population is shrinking, weakening the tax base. Looking at National Pension alone, it's expected to turn to deficit from 2041, and health insurance also faces spending pressure from aging. Maintaining current fiscal management methods will be difficult in this situation. Structural reform including pension reform and revenue base expansion is needed, like Germany or Sweden.
Third, risks of rapidly increasing interest burden during rising interest rate periods are growing. While interest burden is relatively small now due to low rates, when rates rise, interest burden could increase significantly when extending existing bond maturities. With the US raising base rates to 5% level, Korea also faces interest rate increase pressure, potentially causing rapid increase in interest costs' share of budget. As Italy and Spain experienced during European fiscal crisis, when interest burden grows, fiscal policy capacity can rapidly shrink.
Securing fiscal soundness requires comprehensive approaches simultaneously pursuing spending efficiency and revenue enhancement.
4️⃣ In Conclusion
Despite being the largest ever budget of 728 trillion won, economic stimulus effects are limited while fiscal soundness concerns have grown. While the government's focus on future investment is the right direction, it's hard to avoid criticism that realistic responses to current economic recession and structural fiscal pressures are insufficient.
The biggest problem is deepening imbalance between income and spending. With tax revenue decreasing due to economic downturn while welfare spending continues increasing due to aging population, dependence on deficit bond issuance is becoming entrenched. While 110 trillion won deficit bond issuance may be necessary short-term, it results in placing large burdens on future generations long-term.
R&D and AI investments emphasized by the government have correct direction but realistic limitations. It takes considerable time for investment returns to appear, and economic recession could deepen meanwhile. Moreover, securing advantages in global technology competition has limitations with government investment alone - private sector dynamism and innovation ecosystem creation may be more important.
Fundamentally, fiscal structure reform is urgent. Revenue base must be expanded by raising tax burden ratio lower than OECD average, and aging pressures must be prepared for through pension system reform. Also, selection and focus are needed to examine existing spending efficiency, eliminate unnecessary projects, and concentrate on essential areas.
Short-term, more immediate policies for economic stimulus should also be considered. Cash payments to boost consumption, strengthened SME financial support, and expanded private investment incentives for job creation should be pursued alongside R&D investment.
Ultimately, this budget proposal has justification as 'investment for the future' but revealed limitations in failing to properly solve two challenges: 'current difficulties' and 'fiscal sustainability.' More realistic and balanced fiscal policies will be needed going forward.
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