President Lee Jae-myung on the 5th criticized fiscal conservatives, calling them "strange people who sing the austerity song at every turn." On the same day, the president shared on X (formerly Twitter) an article covering an analysis by the Naramsalim Research Institute of the International Monetary Fund (IMF) Fiscal Monitor, which showed that Korea's projected net debt ratio for this year is significantly lower than the Group of 20 (G20) average. The message appears to be that fiscal health will not deteriorate even with expansionary spending, since the state coffers remain sufficient. The institute earlier analyzed that Korea's general government gross debt ratio this year stands at 54.4% of gross domestic product (GDP), roughly half the G20 average of 118.9%, and has worsened less than the IMF's previous projections.
It is true that Korea's fiscal position is sounder than that of major economies. Moreover, deficit spending is unavoidable at certain times to defend the economy, raise the potential growth rate, and expand the future tax base. The problem is that Korea's national debt is growing too fast. The IMF recently identified Korea, along with Belgium, as a country where the national debt ratio is likely to "increase considerably." The Naramsalim Research Institute's analysis also showed that Korea's general government debt ratio this year will have risen 14.7 percentage points from 2019, twice the advanced-economy average of 7.3 percentage points. The only advanced economies with faster increases are three reserve currency issuers — France, the United Kingdom and the United States. Concerns are all the greater because Korea's fiscal deficit growth, driven by low birth rates and an aging population, is only just beginning.
Even some advanced European economies are facing heavy economic burdens as excessive fiscal deficits push up sovereign bond yields, and are enduring political turmoil over debates on pension cuts. Korea may be fine now, but it could face serious difficulties later. Tax revenues have improved recently on the back of the semiconductor boom, but there is no telling how long this will last. As international organizations such as the Organisation for Economic Co-operation and Development (OECD) have advised, now is the time to pursue medium- and long-term measures to strengthen fiscal soundness, including expanding the tax base and cutting spending with uncertain effectiveness. Mandatory expenditures such as the local education finance grant must be restructured, while support should be targeted narrowly at vulnerable groups and focused on strengthening industrial competitiveness. If a sustainable fiscal foundation is not built now, the burden will return as debt for future generations.
