🚨 Government's Flawed Fiscal Forecasts Lead to Debt Spiral
Today Korean Economic News for Beginners | 2025.11.26
0️⃣ Plans to Improve Credibility by Tracking Both Predictions and Results
📌 Fiscal forecasts miss the mark due to demographic changes and slow growth... Enhanced transparency through implementation plans and performance disclosure
💬 The government is reforming its system to improve the credibility of medium-term fiscal forecasts by checking both predictions and actual implementation results together. Government announcements about national debt ratios have been far from reality, losing public trust. Rapid demographic changes and slower economic growth have reduced tax revenue while increasing welfare spending, making fiscal management difficult. However, critics say existing fiscal plans failed to properly reflect these changes. The government plans to include specific implementation methods and performance records in 5-year fiscal plans, and will legally require submission to the National Assembly to increase transparency. The government also plans to strengthen fiscal rules to prevent reckless spending and ensure fiscal soundness. Experts emphasize that "without setting plans and verifying them, trust cannot be restored" and substantial reform is necessary.
1️⃣ Easy Understanding
The government's "national debt forecasts" have been too different from reality, causing problems. The government announced it will not just make plans, but also publicly disclose how those plans were actually carried out. It's like a student making study plans but not following through - the government also made plans but didn't keep them properly.
Let's look at what the problem is specifically. The government announces something called the "National Fiscal Management Plan" every year. This is a planning document that predicts how much national debt will grow over the next 5 years, how much tax will be collected, and where it will be spent. It's similar to making a household budget in advance.
The problem is that these plans were very different from reality. For example, in 2020, the government predicted that "the national debt ratio in 2024 would be about 48% of GDP." But in reality, it went far beyond 50%. A 2% point difference may seem small, but considering our economy's size, it's a difference of tens of trillions of won.
Why did this difference happen? The biggest reason is unexpected changes. First, when crises like COVID-19 hit, the government had to spend huge amounts of money on emergency relief payments. Second, low birth rates and aging happened much faster than expected, causing pension and welfare spending to surge. Third, economic growth rates were lower than expected, so less tax was collected.
However, critics say the government didn't properly revise its plans when these changes happened. It's like continuing to spend money based on your old income even after your salary decreased. Eventually, debt grew much faster than expected, and trust in government plans also fell.
Let's give a specific example. Let's say Mr. A made a living expense plan expecting a monthly salary of 3 million won. Rent 1 million won, food 800,000 won, transportation 300,000 won, savings 900,000 won. But actually, due to the company's poor management, his salary decreased to 2.5 million won. However, Mr. A didn't revise his plan and continued spending like before, filling the shortage with credit card debt. After a few months, his credit card debt grew to millions of won.
The government is in a similar situation. Tax revenue decreased but spending stayed the same or even increased, and the shortage was filled by issuing government bonds (national debt). The problem is that if this continues, debt grows like a snowball, and later the fiscal situation becomes difficult just from the interest burden alone.
So the government's solution is to "check predictions and results together." From now on, when making fiscal plans, instead of just saying "this is what we'll do," they will also reveal "what happened to the plan we made last time, why it changed, and how we'll improve going forward."
For example, if they predicted "national debt ratio of 48% in 2024" in 2020, when it actually becomes 52% in 2024, they will clearly explain why. Like "20 trillion won additional spending due to COVID-19, 15 trillion won tax revenue decrease, 10 trillion won welfare spending increase" in this specific way.
Another important change is strengthening "fiscal rules." Fiscal rules mean legally setting rules that the government must follow when spending money. For example, setting standards like "national debt ratio cannot exceed 60% of GDP" or "fiscal deficit cannot exceed 3% of GDP."
Why are such rules necessary? It's the same for people. If you set rules like "save 10% of monthly income no matter what" or "use credit cards only up to 30% of salary," you can prevent reckless spending. Without such rules, the government's finances can also break down if it spends money whenever needed.
Especially important is "mandatory spending." Mandatory spending refers to money that must be spent because it's set by law. National pension, basic pension, health insurance support, education grants fall into this category. The problem is that this mandatory spending is growing rapidly as the population ages.
As of 2024, mandatory spending exceeds 40% of the total budget. It was around 30% ten years ago but keeps increasing. As aging gets worse in the future, this ratio will continue to rise to 50%, 60%. Then the money the government can freely spend gradually decreases, and eventually it has to borrow more.
Let's give an example. Mr. B earns 3 million won monthly, but 2 million won is fixed for rent and loan interest. With the remaining 1 million won, he must cover food, transportation, communication, and education expenses. There's no room. But as his child enters university, tuition is additionally needed. Mr. B has no choice but to borrow on credit cards. The government is in a similar situation. As mandatory spending increases, money to spend elsewhere becomes insufficient, and eventually it has to borrow.
So experts say just making good plans is not enough. Fundamentally, "improving fiscal structure" is needed to increase revenue and reduce unnecessary spending. They also emphasize that pension and welfare systems must be reformed according to demographic changes.
For this reform to succeed, several things are important. First, it must really be disclosed transparently. Even uncomfortable truths must be honestly told to the public without hiding them. Second, when plans differ, clear reasons and countermeasures must be presented. Third, fiscal rules must be legally enforced to prevent reckless spending for political reasons.
In the end, government finances are everyone's problem. If national debt increases, future generations will eventually bear that burden. If we don't create a transparent and responsible fiscal management system now, our children will shoulder a much bigger load.
2️⃣ Economic Terms
📕 National Debt Ratio
The national debt ratio is the government's total debt divided by GDP (Gross Domestic Product).
- It's an indicator showing how much government debt exists compared to the country's economic size.
- The higher this ratio, the greater the fiscal burden and the weaker the crisis response capability.
- Korea's national debt ratio exceeded 50% as of 2024 and continues to increase.
📕 Mandatory Spending
Mandatory spending refers to budget items whose spending is already determined by law or system.
- Examples include national pension, basic pension, health insurance support, and local government grants.
- The government cannot arbitrarily reduce or increase it, raising fiscal rigidity.
- The proportion of mandatory spending is rapidly increasing due to aging, increasing fiscal pressure.
📕 Fiscal Rules
Fiscal rules are a system that legally sets rules for the government's fiscal management.
- They prevent reckless spending by setting limits on national debt ratios or fiscal deficit limits.
- Germany operates strict rules limiting fiscal deficits to within 0.35% of GDP.
- Korea is also promoting the introduction of fiscal rules, but discussions continue on specific standards and enforcement.
📕 Medium-term Fiscal Forecast
A medium-term fiscal forecast is a plan predicting revenue, spending, and national debt trends for 5 years or more.
- The government announces a 5-year fiscal forecast every year through the "National Fiscal Management Plan."
- It's prepared reflecting economic growth rates, population changes, and system changes.
- If the forecast's accuracy drops, policy credibility declines and fiscal management becomes chaotic.
3️⃣ Principles and Economic Outlook
✅ Fiscal Predictability and Policy Trust
The accuracy of fiscal forecasts is the foundation of trust in government policy.
First, accurate forecasts become the basis for rational decision-making. If the government accurately predicts the fiscal situation for the next 5 years, businesses and households can also plan investments and consumption accordingly. For example, if the government forecasts "no need to raise tax rates in the future," companies invest confidently in the long term. Conversely, if forecasts are often wrong, no one believes government announcements, and economic actors act passively amid uncertainty. This ultimately reduces economic vitality.
Second, it also affects international credit ratings. International credit rating agencies like Moody's, S&P, and Fitch consider fiscal transparency and predictability important when rating a country's credit. If the government's announced fiscal forecasts often miss the mark, they evaluate it as "this country's government lacks fiscal management capability" and may lower the credit rating. When credit ratings fall, government bond interest rates rise, and the government must pay more interest even when borrowing the same amount of money. This eventually leads to increased tax burden on citizens.
Third, when fiscal discipline collapses, it's easy to fall into the temptation of populism. Without an accurate fiscal forecast and implementation monitoring system, politicians can freely distribute policies that appeal to popularity before elections. When policies like "free ○○" or "○○ support payments" pour out without considering fiscal burden, they may gain short-term popularity but long-term fiscal collapse. Greece's fiscal crisis in the early 2010s was also due to the accumulation of such populist policies.
Transparent and accurate fiscal forecasts are the starting point of responsible fiscal management.
✅ Demographic Changes and Fiscal Sustainability
Low birth rates and aging are not just social problems but a structural crisis threatening fiscal sustainability.
First, declining working-age population weakens the revenue base. When working people decrease, core tax sources like income tax and corporate tax decrease. According to Statistics Korea data, Korea's working-age population (ages 15-64) peaked at 37.38 million in 2020 and will continue to decrease, projected to drop to around 27 million by 2050. This means over 10 million fewer people paying taxes. Even maintaining the same tax rate, tax revenue will naturally decrease.
Second, aging explosively increases welfare spending. As of 2024, the population aged 65 and over is about 9.5 million (18% of the total), but by 2050, it's expected to increase to 19 million (40% of the total). As the elderly population grows, basic pension, health insurance, and long-term care insurance spending surge. Currently, the basic pension budget alone is about 20 trillion won, but by 2040, it's estimated to exceed 100 trillion won. In health insurance, elderly medical expenses account for 45% of the total, and when the elderly population doubles, the medical cost burden will also increase tremendously.
Third, the depletion date of the National Pension is accelerating. The National Pension currently holds reserves of 860 trillion won, but it's expected to be depleted around 2055. After depletion, pensions must be paid from government finances, and the scale will reach hundreds of trillions of won annually. This is a huge amount that will account for a significant portion of the current total national budget. Without pension reform, it becomes an unbearable burden for future generations.
Demographic change is already an ongoing reality, and if we don't prepare now, finances can deteriorate to an unmanageable level.
✅ Need for Fiscal Rules and International Cases
Fiscal rules are a legal safety device to maintain fiscal soundness.
First, Germany's "Schuldenbremse (debt brake)" is a representative success case. Germany specified fiscal rules in its constitution in 2009, limiting the federal government's structural fiscal deficit to within 0.35% of GDP. Thanks to this rule, Germany recorded fiscal surpluses from 2014, and also lowered its national debt ratio from 80% to around 60%. While exceptions are made during crises like COVID-19, the rules are strictly applied again once the crisis passes. This system made Germany the country with the soundest finances in Europe.
Second, Switzerland maintains surplus finances with its "debt brake mechanism." Switzerland legalized a balanced budget principle considering economic cycles. When the economy is good, it runs surpluses and saves, and when the economy is bad, it uses those savings to cover deficits. It's a method of balancing revenue and spending in the long term. Thanks to this, Switzerland's national debt ratio remains stable at around 40%. With fiscal capacity, it can respond sufficiently even when crises come.
Third, without fiscal rules, it's difficult to withstand political pressure. Korea doesn't yet have strong fiscal rules. If the opposition party wants to increase popular spending, there's weak legal basis to stop it, and the ruling party is also prone to the temptation to increase spending before elections. If fiscal rules are clearly set by law, you can brake by saying "this budget violates the rules." The IMF and OECD have also recommended Korea introduce fiscal rules several times.
Fiscal rules are not just numerical restrictions, but the legalization of responsibility for future generations.
4️⃣ In Conclusion
The government's fiscal forecast system reform is late but absolutely necessary. Until now, government fiscal plans were just "pie in the sky." There were many nice plans, but they weren't actually kept, and there was no system to verify the results.
The biggest problem is loss of trust. Even when the government says "the national debt ratio will be about this much," citizens and markets no longer believe it. Because it consistently missed the mark. This distrust has a negative impact on the overall economy. Companies hesitate to invest, households reduce consumption, and foreign investors see Korea as an uncertain market.
If the government discloses predictions and results together as promised, and clearly explains why differences occurred, it will be the first step toward restoring trust. But we can't stop here. More fundamental fiscal structural improvement is needed.
First, the revenue base must be expanded. To increase tax revenue without raising tax rates in a situation where population is declining, the underground economy must be formalized, tax evasion prevented, and new tax sources developed. New tax categories like digital tax or carbon tax should also be actively reviewed.
Second, unnecessary spending must be boldly reduced. Among government projects, there are many that are ineffective or duplicative. Preliminary feasibility studies must be strengthened, and even during project implementation, performance should be evaluated and ineffective projects boldly discontinued.
Third, mandatory spending must be made manageable. Especially pension reform can no longer be delayed. The depletion date of the National Pension must be postponed, the recipients and amounts of basic pension rationally adjusted, and health insurance finances also stabilized.
Fourth, fiscal rules must be legislated. Clear upper limits on national debt ratios and fiscal deficit limits must be set, and a system created to impose concrete sanctions if violated.
From the perspective of young professionals or financial beginners, national debt may feel like a distant story. But this is everyone's problem. The debt the government incurs now will eventually be repaid by us in the future, by our children. Through increased taxes or reduced welfare.
Around 2050, when today's 30-year-olds are in their 60s, some forecasts say Korea's national debt ratio will exceed 100% of GDP. Regretting "we should have prepared then" won't help. We must act now.
In the end, transparent fiscal management, accurate forecasting and implementation monitoring, and strong fiscal rules must work together to protect fiscal soundness. We hope this reform becomes the start of real change, and now is the time when the government, National Assembly, and all citizens must recognize the importance of fiscal soundness and work together.
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