🚨 Korea's Government Budget Enters 700 Trillion Won Era
Today Korean Economic News for Beginners | 2025.09.07
0️⃣ National Debt Breaks 1,415 Trillion Won, GDP Ratio Exceeds 50% for First Time
📌 700 Trillion Won Budget Era Begins, But Debt Shadows Grow Darker
💬 Korea's 2026 government budget proposal has exceeded 700 trillion won for the first time, marking the largest scale in history. However, with minimal revenue increases, government bond issuance is inevitable, and national debt is expected to increase by 110 trillion won next year alone, reaching 1,415 trillion won. The ratio of national debt to GDP will also reach 51.6%, exceeding 50% for the first time. The Ministry of Economy and Finance explained this as "proactive investment for economic recovery and securing future growth engines," but concerns about fiscal soundness are rising, with experts pointing out the urgent need for efficient fiscal management, tax base expansion, and structural reforms. Particularly concerning is that government bond interest alone is expected to exceed 36 trillion won, creating a vicious cycle where investment capacity in other areas decreases.
1️⃣ Easy to Understand
The government's budget for next year has exceeded 700 trillion won for the first time. However, the situation is becoming serious as the government needs to borrow money because spending is much higher than income.
We can think of the government budget as the country's "household account book." Just like a family plans how much to earn and spend each month, the government also plans in advance how much to collect in taxes and where to spend it over a year.
Next year's government budget of 700 trillion won is a really huge amount. If we stack this in 10,000 won bills, the height would reach 7,000 kilometers, higher than the space station. But the problem is how to get this money.
The government has two main ways to get money. First is collecting taxes, and second is borrowing money. Next year, the government can collect about 480 trillion won in taxes, but needs to spend 700 trillion won, so about 220 trillion won is short. This shortage must be borrowed by issuing government bonds.
Government bonds are "debt certificates" issued by the government. The government borrows money from citizens, banks, and foreigners by promising to "pay back later with interest." The problem is that this debt keeps piling up.
Currently, Korea's national debt is about 1,300 trillion won, but it's expected to increase by another 110 trillion won next year, reaching 1,415 trillion won. This equals 51.6% of Korea's annual economic size (GDP).
The bigger problem is that as debt increases, more interest must be paid. Next year, over 36 trillion won is expected to be paid just in government bond interest. This is close to half of the Ministry of Education's budget (84 trillion won).
The government explains that "investment is necessary to revive the economy and create future growth engines." However, concerns are growing that simply increasing debt could create bigger problems later.
Ultimately, experts commonly agree that national finances, like household finances, need to balance income and expenses and spend efficiently only where absolutely necessary.
2️⃣ Economic Terms
📕 National Debt
National debt refers to the total debt of the government, including government bonds and borrowings issued to cover government spending.
- It includes all debts of central and local governments.
- It's internationally standard to evaluate by GDP ratio rather than simple amount.
- OECD countries usually consider it a warning sign for fiscal soundness when it exceeds 60% of GDP.
📕 National Debt to GDP Ratio
The national debt to GDP ratio is an important indicator showing a country's debt burden level relative to its economic power.
- GDP (Gross Domestic Product) is the total value of all goods and services produced in a country in one year.
- The higher this ratio, the greater the country's debt burden.
- Korea is expected to exceed 50% for the first time next year, drawing attention.
📕 Government Bond Interest
Government bond interest refers to the interest promised to investors when the government issues bonds.
- As national debt increases, the annual interest costs also continue to rise.
- Higher interest burdens mean less money available for education, welfare, infrastructure, and other areas.
- Korea's government bond interest is expected to exceed 36 trillion won next year, becoming a significant burden.
📕 Fiscal Balance
Fiscal balance is the value of government's total revenue minus total spending, showing whether national finances are in surplus or deficit.
- If revenue exceeds spending, it's a fiscal surplus; if spending exceeds revenue, it's a fiscal deficit.
- Korea has been recording fiscal deficits for several years, making government bond issuance inevitable.
- Continued deficits create structural problems where national debt keeps increasing.
3️⃣ Principles and Economic Outlook
✅ Effects and Side Effects of Expansionary Fiscal Policy
Let's examine both sides of the government's policy to stimulate the economy by increasing the budget.
First, there are short-term economic stimulus effects, but long-term burdens increase. When the government increases spending, it can inject vitality into the economy through public works, welfare expansion, and job creation. Especially during economic downturns, government intervention is necessary to create demand when private investment shrinks. However, if this approach continues, national debt rapidly increases, and later, interest burdens can create a vicious cycle where investment in other areas becomes difficult. In fact, Japan maintained expansionary fiscal policy for over 30 years since the 1990s and ended up in a serious situation where the national debt to GDP ratio exceeded 200%.
Second, there's a problem of declining efficiency in fiscal investment. Initially, there are many investments that contribute to productivity improvements like infrastructure construction or technology development, but over time, politically motivated or populist spending tends to increase. Also, the same amount of investment produces diminishing economic stimulus effects, showing a "diminishing marginal utility" phenomenon. Therefore, how efficiently money is spent and where it's spent is more important than simply increasing budget size. Experts emphasize that "even when spending money, it should be concentrated on areas that create future growth engines."
Third, fundamental solutions to revive private economic vitality are needed. Since government spending alone has limitations, it's important to create an environment where private companies can invest and create jobs. Investment enthusiasm among companies should be increased through deregulation, tax system reforms, and increased labor market flexibility. It's also necessary to discover new growth engines through new industry development and digital transformation support. Only this way can the economy grow self-sufficiently without the government continuously borrowing money.
Expansionary fiscal policy is necessary but must be designed in a sustainable direction to avoid burdening future generations.
✅ Revenue Enhancement and Tax Policy Direction
Let's analyze ways to increase government revenue and restore fiscal soundness.
First, structural improvement through tax base expansion is needed. While Korea's tax burden rate is lower than the OECD average, expanding the tax base is more important than simply raising tax rates. Tax revenue can be increased through formalizing the underground economy, strengthening tax evasion prevention systems, and discovering new taxation targets. Particularly, taxation measures for new added value created by the expansion of the digital economy should be prepared. It's also important to normalize taxation on real estate and financial income to improve tax burden equity across income types.
Second, natural tax revenue increases through economic growth should be induced. While raising tax rates may increase tax revenue in the short term, it can shrink economic activity and actually reduce tax revenue in the long term. Therefore, increasing the economic growth rate to expand the overall pie is the fundamental solution. Economic vitality can be enhanced through corporate investment incentives, startup support, and new industry development, naturally increasing corporate tax, income tax, and value-added tax revenues. In fact, it's known that when the growth rate increases by 1 percentage point, tax revenue usually increases by about 3-4 trillion won.
Third, it should be effective when conducted alongside expenditure restructuring. Reducing unnecessary spending is as important as increasing tax revenue. Fiscal efficiency should be improved through eliminating overlapping projects, reducing inefficient subsidies, and improving wasteful management of public institutions. Particularly, various cash welfare programs introduced as populist policies need to be reviewed. Instead, investment should be increased in areas that help future growth such as education, research and development, and infrastructure. Only by simultaneously pursuing revenue enhancement and expenditure restructuring can fiscal soundness be restored.
Revenue enhancement requires a balanced approach that simultaneously considers economic growth and tax equity.
✅ Population Structure Changes and Long-term Fiscal Outlook
Let's examine the long-term impact of low birth rates and aging on finances and response measures.
First, fiscal pressure will accelerate due to explosive welfare spending increases. Korea's population aged 65 and over is projected to surge from 20% in 2025 to 40% in 2050. Accordingly, welfare spending on pensions, medical costs, and care services will increase explosively. The National Pension depletion point is expected in 2055, and health insurance spending is also increasing by 5-7% annually. Meanwhile, the working-age population will decrease, weakening the tax base. According to the Ministry of Economy and Finance's long-term outlook, the national debt ratio could reach the 150% range by 2065.
Second, fundamental reform of pension and medical systems is inevitable. If the current welfare system is maintained as is, finances will deteriorate to an unsustainable level. Sustainability must be secured through adjusting pension eligibility age, raising premium rates, and reforming benefit structures. To reduce medical costs, it's necessary to build a prevention-centered medical system, introduce health management incentives, and improve medical efficiency. Efforts to expand the tax base through increasing elderly employment and female economic participation rates should also be pursued simultaneously.
Third, fundamental solutions through increasing birth rates and improving productivity are needed. While fiscal reform is necessary in the short term, the population structure itself must be improved in the long term. Efforts to increase birth rates are needed through expanding childcare support, creating work-life balance culture, and reducing housing cost burdens. At the same time, labor productivity should be increased through automation, digitalization, and artificial intelligence utilization to create a structure where the economy can be sustained with a smaller population. Expanding the use of foreign workers is also an option to consider.
Since population structure changes are unavoidable reality, it's important to prepare in advance to minimize the shock.
4️⃣ In Conclusion
The government budget breaking through 700 trillion won is a new milestone in Korean economic history, but it also raises deep concerns about fiscal soundness. The problem is not simply that the scale has grown, but that the structure of dependence on debt is deepening.
What's most concerning is that national debt is rapidly increasing and will exceed 50% of GDP for the first time. This means that the line of sound fiscal management that Korea has maintained has collapsed. Particularly, with interest burdens alone exceeding 36 trillion won, a vicious cycle is beginning where capacity to invest in other areas decreases.
However, unconditionally reducing spending is not the only answer. In an economic downturn situation, it's necessary for the government to step up to invest and create jobs. What's important is "how to spend." Focus should be on areas that create future growth engines rather than populist spending that appeals to short-term popularity.
Revenue enhancement is also an unavoidable task. However, rather than simply raising tax rates, it's preferable to expand the tax base, prevent tax evasion, and allow tax revenue to increase naturally through economic growth. Efforts to reduce unnecessary spending through expenditure restructuring should also be pursued simultaneously.
In the long term, fundamental reform in preparation for population structure changes is needed. If the structural problem of exploding welfare spending and weakening tax base due to low birth rates and aging is not solved, there will be limits no matter how many short-term prescriptions are applied. Comprehensive measures for increasing birth rates and improving productivity are needed along with pension and medical system reforms.
Above all, social consensus on fiscal policy is important. If populist policies are recklessly pursued due to political considerations, future generations will ultimately bear that burden. We must not make the mistake of mortgaging the future for present convenience.
Ultimately, what we need in the era of 700 trillion won budget is not "spending more" but "spending better." Wise choices that secure fiscal sustainability while creating future growth engines are urgently needed.
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