🚨 IMF Warns Korea's Finances
Today Korean Economic News for Beginners | 2025.09.25
0️⃣ World's Fastest Aging, National Debt Could Hit 70% of GDP Without Reform
📌 IMF Urges "Fiscal Rules and Structural Reform Needed Now", Government Sticks to Spending Policy
💬 The International Monetary Fund (IMF) strongly warned Korea about the need for long-term fiscal reform due to rapid aging. The IMF said Korea is aging faster than any other country in the world, and the national debt ratio, currently 49.1% of GDP, could exceed 70% in 10 years without reform. The IMF emphasized that Korea has limited tools to respond to fiscal crises because it doesn't have a reserve currency, and called for fiscal rule legislation and pension and healthcare system reforms. However, the government still maintains an expansionary fiscal policy and delays introducing fiscal rules, which may lead to future policy conflicts.
1️⃣ Easy to Understand
Countries can borrow money just like people do. This is called "national debt" or "government debt." The IMF is warning Korea because the country's debt is growing rapidly compared to its economic size.
Let me explain what national debt means in simple terms. Just like a person borrows money from a bank to buy a house, countries also borrow money to do important things. They need lots of money to build roads, provide welfare benefits, or support businesses during tough economic times. When taxes aren't enough, the government issues bonds to borrow money.
Korea's national debt is currently 49.1% of GDP (Gross Domestic Product). In simple terms, this means Korea owes about half of what the country earns in a year. It's like a person earning $50,000 a year having $25,000 in debt.
The problem is that this ratio keeps growing. The IMF warned that it could reach 70% in 10 years if things continue as they are. Using our example, it's like that person's debt growing to $35,000.
Why is this happening? The biggest reason is "aging." Korea is getting older faster than any other country in the world. When the elderly population grows, spending on pensions and healthcare increases rapidly. At the same time, the working population decreases, so tax revenue goes down. This creates a situation where the government needs to borrow more and more money.
Also, Korea has a weakness as a "non-reserve currency country." The US can print dollars, and Europe uses the euro, but Korea's won doesn't have that international status. So when a crisis happens, it's harder to solve problems on its own, and if foreign investors get worried, it can become a bigger problem.
The IMF suggested two main solutions. First is to create "fiscal rules" by law. This means setting rules in advance so national debt doesn't exceed certain levels. Second is to reform pension and healthcare systems to control the increase in spending due to aging.
However, the government is still hesitant about these reforms. They maintain that government spending should be increased because the economy is currently struggling. While this might be the right policy in the short term, there are concerns that the national debt problem could become more serious in the long term.
Right now, we're at a crossroads between short-term economic stimulus and long-term fiscal health.
2️⃣ Economic Terms
📕 National Debt Ratio
National debt ratio is the total debt of a country divided by GDP, showing how much debt burden there is compared to economic size.
- Korea currently has 49.1% compared to GDP, which is lower than the OECD average but is increasing rapidly.
- Generally, 60% is considered a warning sign, and over 90% is known to negatively affect economic growth.
- The US (120%) and Japan (250%) are high, but they have reserve currencies, so their situations are different.
📕 Fiscal Rules
Fiscal rules are laws that set rules the government must follow when managing finances.
- They set upper limits on debt ratios or budget deficits to prevent unlimited expansion of government finances.
- Germany limits it to 3.25% of GDP, the UK to 3%, and most developed countries operate such systems.
- Korea hasn't introduced this yet, so the predictability of fiscal management is criticized as being low.
📕 Non-Reserve Currency Country
A non-reserve currency country is a country that doesn't have a currency widely used in international transactions like the dollar or euro.
- During crises, it's difficult to print unlimited amounts of their own currency, so response options are limited.
- Trust from foreign investors is important, so fiscal health must be managed more strictly.
- Korea, Brazil, India, and most emerging countries fall into this category.
📕 Aging Rate
Aging rate is the percentage of people aged 65 and over in the total population, showing the degree of aging in society.
- Korea is currently around 17%, but it's expected to rise sharply to 25% in 2030 and 40% in 2050.
- As aging accelerates, pension and healthcare spending increases while tax revenue decreases, putting a big burden on government finances.
- The OECD says Korea shows the fastest aging speed in the world.
3️⃣ Principles and Economic Outlook
✅ Structural Impact of Aging on Government Finances
Let's analyze specifically how Korea's rapid aging affects national finances.
First, increased spending due to aging is inevitable and will happen rapidly. Korea's population aged 65 and over is currently around 17% of the total, but it's expected to rise sharply to 25% in 2030 and 40% in 2050. This is a speed that no other country in the world has experienced. Assuming that pension and healthcare costs for each elderly person average about 20 million won per year, every 1 million increase in elderly population creates 20 trillion won in additional annual spending. Considering that the current national budget is around 600 trillion won, this is an enormous burden.
Second, the country will face a double burden as the tax base shrinks due to a decrease in the working-age population. The working-age population (15-64 years old) is expected to decrease by more than 40% from 37.38 million in 2020 to 22.33 million in 2070. This means that labor income and corporate activities, which are major sources of income tax and corporate tax, will decrease. As the "scissors effect" begins in earnest with spending increasing and income decreasing, the government will face a situation where it must borrow more money.
Third, once these structural changes begin, they are very difficult to reverse. Aging is a natural population change, so it cannot be changed by policy in a short time. Even if policies to increase birth rates are implemented, it takes 20-30 years for their effects to appear. Therefore, if fiscal structures are not reformed starting now, there is a high possibility of reaching an irreversible crisis situation.
Since aging is an unavoidable reality for Korea, it's essential to transition to a fiscal structure suitable for this in advance.
✅ Fiscal Rules and International Comparison
Let's look at the necessity of introducing fiscal rules and lessons from overseas cases.
First, most developed countries have introduced fiscal rules after experiencing fiscal crises and are achieving results. Germany introduced a "debt brake" system after the 2008 global financial crisis, limiting structural fiscal deficits to within 0.35% of GDP. As a result, it succeeded in lowering the debt ratio from 80% of GDP in 2010 to below 60% in 2019. The UK also operates a system where debt ratio caps are set through a fiscal charter, and if these are exceeded, the finance minister must explain to parliament.
Second, fiscal rules have the effect of preventing reckless fiscal management due to political incentives. Politicians facing elections have strong incentives to increase fiscal spending to win votes. However, legally established rules can suppress such temptation. Switzerland drastically lowered its debt ratio from 55% to 25% of GDP thanks to the "debt brake" introduced in 2001. Chile used fiscal rules to suppress excessive spending even during copper price booms and accumulated fiscal capacity in preparation for economic downturns.
Third, Korea also urgently needs to introduce fiscal rules, but political resistance is significant. The current government is passive about introducing fiscal rules, saying "fiscal policy should be operated flexibly according to economic conditions." However, experts emphasize that "even with rules, exceptions can be made during economic downturns" and "the important thing is maintaining fiscal discipline during normal times." The IMF also recommended that "Korea should introduce rules when it has fiscal capacity to maintain crisis response capability."
Fiscal rules have been proven by international experience to be the most effective institutional safety device for preventing fiscal crises.
✅ Future Outlook and Policy Alternatives
Let's comprehensively look at ways for Korea to avoid fiscal crisis and create a sustainable fiscal structure.
First, a gradual and realistic fiscal reform roadmap is needed. Since rapid austerity can bring economic recession, medium to long-term goals should be set and approached step by step. For example, targets could be set to maintain debt ratios within 60% of GDP by 2030 and lower them to below 55% by 2040. For this, it's important to make specific plans to improve fiscal balance by 0.5% of GDP each year and give them legal binding power.
Second, spending efficiency and income base expansion must be pursued simultaneously. On the spending side, structural spending pressure must be reduced through eliminating duplicate projects, rationalizing subsidies, and pension reform. In particular, it's necessary to gradually raise the pension starting age for national and civil servant pensions and adjust healthcare insurance copayment rates to reasonable levels. On the income side, focus should be on expanding tax sources and preventing tax avoidance. New taxation plans suited to the digital economy expansion and introduction of environmental taxes like carbon taxes should also be considered.
Third, forming national consensus and political leadership is key. Fiscal reform involves short-term pain but is essential for the country's long-term sustainability. The government should transparently explain to citizens the seriousness of the current situation and the necessity of reform. Also, fair measures should be prepared so that reform burdens don't concentrate on specific groups. Politicians should also show responsible attitudes that consider the country's future rather than short-term popularity.
Ultimately, now is a critical turning point for Korea's fiscal policy, and the longer choices are delayed, the greater the burden on future generations will be.
4️⃣ In Conclusion
The IMF's warning means Korea has reached a point where it must fundamentally change its fiscal policy paradigm. Given the world's fastest aging speed and structural vulnerability as a non-reserve currency country, this is a task that can no longer be delayed.
Korea's current fiscal situation looks good on the surface. A debt ratio of 49.1% of GDP is lower than the OECD average (71%) and very healthy compared to the US (120%) or Japan (250%). However, what's important is not the current level but the speed of future change. Korea is likely to see its debt ratio exceed 70% within 10 years, and it's expected to rise even more steeply after that.
The more serious problem is that this change is "structural." Since aging is a natural population change, it cannot be changed by policy in a short time. Therefore, if fiscal structures are not adjusted in advance to suit aging starting now, much greater costs may have to be paid later.
The most urgent of the solutions presented by the IMF is legalizing fiscal rules. Looking at cases from Germany, the UK, and Switzerland, having fiscal rules can prevent reckless fiscal management due to political incentives and maintain long-term fiscal health. Now, when economic conditions are relatively good, is the right time for Korea to introduce fiscal rules.
Pension and healthcare system reform is also an unavoidable task. If current systems are maintained as they are, it's certain that fiscal burdens will explode with aging progress. Of course, such reforms are politically difficult and may involve social conflict, but the longer they're delayed, the greater the pain will be.
It's understandable that the government currently sticks to an expansionary fiscal policy. Premature austerity in a situation where economic recovery is not complete could have reverse effects. However, short-term economic stimulus and long-term fiscal health can coexist. What's important is making it clear that current expansionary fiscal policy is a temporary measure and presenting specific medium to long-term fiscal reform plans.
Ultimately, today's choices will determine the fiscal situation that future generations will inherit. At the crossroads of whether to bear the pain of reform now or pass greater burdens to future generations, we must make responsible choices.
View Table of Contents