🚨 Lee Jae-myung Government's Expansionary Fiscal Policy Surge
Today Korean Economic News for Beginners | 2025.09.09
0️⃣ 150 Trillion Won Borrowed from Bank of Korea in Three Months, Red Alert for Fiscal Soundness
📌 Debt surge due to expansionary fiscal policy...31.6 trillion won borrowed in August alone, highest ever
💬 The Lee Jae-myung government borrowed 150 trillion won from the Bank of Korea in just three months while maintaining an expansionary fiscal policy. In August alone, 31.6 trillion won was borrowed, marking the highest monthly borrowing amount in history. This happened because government spending increased rapidly compared to revenue due to increased mandatory spending like expanded basic pensions and child allowances, extended unemployment benefits for youth, plus cash support programs like 'office worker lunch subsidies'. The Ministry of Economy and Finance explained this as "temporary fund management," but experts are concerned about deepening structural fiscal deficits and burden transfer to future generations. Next year's budget plan includes further expansion of welfare spending and cash support, expected to accelerate fiscal soundness deterioration.
1️⃣ Easy Understanding
The government is borrowing huge amounts of money from the Bank of Korea, and the amount is so large that it's becoming a problem. It's like when a person uses too many credit cards - the government is also spending much more than it earns.
Let me first explain what it means for the government to borrow money from the Bank of Korea. Just like individuals, the government has bank accounts. When the government needs to spend more money than it receives from taxes, it can temporarily borrow money from the Bank of Korea. This is called "temporary borrowing," similar to using an overdraft account.
The problem is that this amount has increased too rapidly recently. In three months, 150 trillion won was borrowed, which is almost half of Korea's annual budget - an enormous amount. Especially in August alone, 31.6 trillion won was borrowed, the largest monthly amount in history.
Why did the government need to borrow so much money? The biggest reason is that government spending increased rapidly. The government raised basic pensions, increased child allowances, and decided to give more unemployment benefits to young people. Additionally, new cash support policies like 'office worker lunch subsidies' were added.
These policies help citizens immediately, but from the government's perspective, it means money going out is increasing rapidly. Meanwhile, tax income didn't increase as much as expected because the economy wasn't doing well. As a result, the government had to borrow money to cover the shortage.
The government explains this as "just temporary fund management," but experts are worried. If this pattern continues, government debt could grow like a snowball, and future generations would have to bear that burden.
Simply put, the government is spending a lot of money to help citizens right now, but it's borrowing too much money to get that money, which could be a problem in the long run.
2️⃣ Economic Terms
📕 Expansionary Fiscal Policy
Expansionary fiscal policy is when the government increases spending or reduces taxes to boost the economy.
- It's a way for the government to actively spend money to stimulate the economy when times are bad.
- In the short term, it helps recovery by increasing consumption and investment, but government debt can increase.
- When the economy is good, it's better to reduce spending, but it's often politically difficult to do.
📕 Temporary Borrowing
Temporary borrowing is money the government borrows temporarily from the Bank of Korea, similar to an overdraft account.
- It's a way to get funds when tax income comes in late or there are urgent expenses.
- Usually, it should be repaid within days to weeks, but recently it's becoming longer-term.
- When the amount gets bigger and the period gets longer, it's seen as a sign of structural deficit.
📕 Mandatory Spending
Mandatory spending is budget that must be spent according to law, which the government cannot easily reduce.
- Examples include pensions, health insurance support, unemployment benefits, and basic livelihood security benefits.
- Once a system is created, it tends to keep growing, so it's also called "the mandatory spending trap."
- As society ages, the proportion of mandatory spending is rapidly increasing.
📕 Fiscal Soundness
Fiscal soundness is an indicator of how strong the government's finances are.
- It comprehensively evaluates the balance between income and spending, the size of debt, and the ability to repay debt.
- If fiscal soundness is poor, the country's credit rating can fall and interest rates can rise.
- It's important to maintain an appropriate level to avoid passing burdens to future generations.
3️⃣ Principles and Economic Outlook
✅ Background and Political Incentives of Expansionary Fiscal Policy
Let's analyze the background and political motives behind the Lee Jae-myung government's expansionary fiscal policy.
First, the continued economic recession since COVID-19 has become justification for expansionary fiscal policy. The logic is that the government should actively step in when private economic vitality has declined due to global supply chain disruptions, continued high interest rates, and real estate market slump. Indeed, both consumer sentiment index and corporate investment sentiment index remain poor, so economic stimulus through government spending is somewhat necessary. However, experts point out that focus should be on productivity improvement and structural reform rather than simple cash support.
Second, political considerations ahead of the next presidential election are also affecting expansionary fiscal policy. Policies like 'office worker lunch support' and 'expanded youth unemployment benefits' have strong populist characteristics that appeal to voters rather than economic effects. These policies can increase government approval ratings in the short term, but in the long term, they only increase fiscal burden and may not help much with economic structural improvement. Especially, cash support is addictive - once started, it's difficult to stop.
Third, social pressure for welfare expansion is also a cause of increased spending. As society enters an aging phase, basic pension recipients are increasing, and child allowances are expanding to solve the low birth rate problem. These welfare expenditures have structural characteristics that make them difficult to reduce easily because they're based on social consensus. The problem is that welfare is being expanded without sufficiently establishing the tax base to support it.
While expansionary fiscal policy has economic stimulus effects, concerns about sustainability are growing as political incentives and structural factors work together complexly.
✅ Deepening Fiscal Deficit and Increasing National Debt
Let's look at the specific impact of rapid spending increases on national finances.
First, increased dependence on temporary borrowing is a signal of structural deficit. Originally, temporary borrowing was a short-term funding tool to resolve timing mismatches between revenue and expenditure. But recently, as the scale has grown and repayment periods have lengthened, it's essentially becoming a means to cover deficit financing. Borrowing 150 trillion won in three months means fundamental revenue-expenditure imbalance, not simple cash flow adjustment. If this trend continues, it could also constrain the Bank of Korea's policy operations.
Second, there are concerns about interest rate pressure from increased government bond issuance. When the government increases bond issuance to cover insufficient finances, interest rate pressure occurs in the bond market. Indeed, 3-year government bond rates have been showing an upward trend recently, which is interpreted as reflecting market concerns about fiscal deterioration. If government borrowing costs rise, interest payments increase, potentially creating a vicious cycle that further accelerates fiscal deterioration.
Third, rising national debt ratio is expected to reduce fiscal policy capacity. Currently, Korea's national debt ratio is around 50% of GDP, but if expansionary fiscal policy continues, it's likely to exceed 60%. When the national debt ratio exceeds 60%, international concerns about fiscal soundness are raised, and the capacity to actively implement fiscal policy during future economic crises is reduced. This could result in exhausting future policy tools for immediate stimulus effects.
Deepening fiscal deficit is intensifying the dilemma between short-term economic stimulus effects and long-term fiscal sustainability.
✅ Future Outlook and Improvement Plans
Let me present the outlook if current fiscal management continues and desirable improvement plans.
First, if current trends continue, the possibility of fiscal crisis increases. Welfare spending expansion and cash support are expected to increase next year, so fiscal burden will grow even more. Especially, increased pension and medical spending due to aging is an unavoidable trend, so if spending in other areas isn't reduced, fiscal deficit will inevitably increase rapidly. If the national debt ratio exceeds 70%, it could lead to credit rating downgrades and rapid interest rate increases, requiring proactive response.
Second, tax system reform to expand the revenue base is urgent. If only spending increases without establishing revenue expansion measures, fiscal imbalance will inevitably deepen. Tax revenue should be increased through adjusting income tax brackets, raising corporate tax rates, strengthening comprehensive real estate tax, or new tax sources like carbon tax or digital tax should be developed. Of course, these measures involve significant political burden, but they're unavoidable choices for fiscal soundness.
Third, improving spending efficiency and readjusting priorities is necessary. The fiscal spending structure should be changed to focus on productivity improvement and competitiveness enhancement rather than cash support. For example, allocating budget to job training, technology development, and infrastructure investment rather than consumption support like 'lunch subsidies' is more effective in the long term. Also, there's a need to eliminate overlaps in existing welfare systems and reform them to focus intensive support on truly needy groups.
For fiscal policy sustainability, the revenue and expenditure structure must be fundamentally reformed from a long-term perspective rather than short-term popularity.
4️⃣ In Conclusion
The Lee Jae-myung government's expansionary fiscal policy has necessary aspects during economic recession, but continuing in the current manner could pose serious risks to fiscal sustainability. Particularly, 150 trillion won in temporary borrowing in three months is interpreted as a signal of structural deficit beyond simple liquidity adjustment.
The most concerning point is that spending is increasing rapidly without expanding the revenue base. Basic pensions, child allowances, and unemployment benefit expansion are socially necessary policies, but there's insufficient stable funding to support them. Adding populist cash support like 'office worker lunch subsidies' makes fiscal burden grow uncontrollably.
In the short term, these policies can help citizens and contribute to consumption stimulation. But in the long term, they could lead to rapid national debt increase, rising interest rates, and reduced fiscal capacity, ultimately burdening the entire economy. Particularly, intergenerational equity issues arise since future generations must bear this burden.
The bigger problem is that this expansionary fiscal policy isn't leading to genuine economic structural improvement. Cash support has temporary consumption increase effects but contributes little to productivity improvement or competitiveness enhancement. It could actually increase government dependence and reduce private innovation motivation.
The desirable direction is to strengthen the revenue base along with spending expansion. While maintaining necessary welfare, stable funding should be secured through tax system reform, and inefficient spending should be boldly eliminated. Also, the fiscal spending structure should be reformed toward education, training, and technology development that foster future growth engines rather than simple cash support.
Ultimately, current expansionary fiscal policy urgently needs direction change. A balanced approach considering both fiscal soundness and long-term growth potential is needed at this point, without being absorbed in immediate political effects.
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