The Organization for Economic Cooperation and Development (OECD) projected in its "2026 Korea Economic Survey" that Korea's government debt-to-GDP ratio will reach 51.4% this year and 52.3% next year. In its economic outlook released last month, the OECD had forecast that Korea's government debt ratio would stand at 48.2% and 50.2% of GDP this year and next year, respectively. Citing a calculation error in its earlier projections, the organization revised the figures upward in less than a month.
What stands out is the OECD's recommendation in this report that Korea pursue fiscal consolidation to cope with rapid aging and fiscal risks. The OECD pointed out that if the Korean government takes no action, the government debt ratio will swell to 200% of GDP by 2050. This sounds like a chilling warning that continuing the current expansionary fiscal stance could saddle future generations with a mountain of debt. The OECD is not the only body concerned about Korea's rapid increase in national debt. In a report earlier this year, global credit rating agency Moody's projected that Korea's government debt-to-GDP ratio would exceed 60% by 2030.
Korea's government debt ratio is still not high compared with major economies around the world. Japan's national debt ratio exceeds 200%, and the United States has surpassed 120%. France and the United Kingdom hover around 100%. The problem is that Korea's national debt is growing far too fast compared with these major economies. The government's approach to national debt is also a concern. The government argues that if active fiscal policy drives economic growth, tax revenue will increase and GDP will rise, naturally reducing the national debt ratio. But if the focus is on expanding cash handouts rather than investment to improve the economy's fundamentals, the effect on improving GDP will inevitably fall short.
President Lee Jae-myung recently mentioned the need to use the increase in tax revenue from the semiconductor boom as a funding source for a supplementary budget. However, while the current memory super-cycle is delivering a huge tax revenue windfall to the Korean economy, such a favorable tax revenue environment cannot continue indefinitely. Excessive fiscal expansion could ultimately lead to a surge in national debt and a decline in national credibility, prompting an exodus of foreign investment. As international organizations such as the OECD advise, it is time to accelerate the legislation of fiscal rules for fiscal soundness based on an expanded revenue base and structural reforms to raise the potential growth rate. The introduction of an independent fiscal institution to monitor fiscal transparency, as proposed by the OECD, is also worth actively considering.
