South Korea’s national debt continues to rise rapidly despite the Yoon Suk-yeol administration’s fiscal austerity efforts, including limiting government spending growth to 3% for two consecutive years.
The Yoon administration criticized the former Moon Jae-in administration for its “irresponsible fiscal management.” During Moon’s five-year term, the national debt surged by more than 400 trillion won ($300 billion) as the annual budget spending increased by an average of 8.7%. Last year, the Yoon administration lowered budget spending growth to 5.1% and this year to 2.8%, with plans to increase it to 3.2% next year, which is 1 percentage point lower than initially planned.
“National debt surged by over 400 trillion won during the former administration,” President Yoon said at a Cabinet meeting to approve the government’s budget proposal of 677.4 trillion won ($509.5 billion) for 2025. Yoon added that this debt burden has created significant fiscal challenges for his government.
Despite these fiscal tightening measures, South Korea’s debt is projected to keep climbing. By the end of next year, the national debt is expected to reach 1,277 trillion won, up more than 200 trillion won from 2022, Yoon’s first year in office. The country’s national debt has risen quickly in the past few years, from around 723.2 trillion won in 2019 to 846.6 trillion won in 2020, 970.7 trillion won in 2021, and a record 1,067.4 trillion won in 2022. The Finance Ministry forecasts that by 2027, the final year of Yoon’s term, the national debt will surge to 1,432.5 trillion won, marking an increase of 364.8 trillion won over five years.
The Moon administration had the fiscal flexibility to implement ten supplementary budgets for job creation and COVID-19 response due to excess tax revenue of 50 trillion to 60 trillion won, collected primarily through comprehensive real estate holding taxes in 2021 and 2022.
In contrast, the Yoon administration’s push for fiscal austerity and tax cuts has faced challenges, particularly amid sluggish exports and weakened domestic demand.
The government, which has undertaken 20 trillion won in spending restructuring for three consecutive years, aims to reduce the administrative fiscal deficit to GDP ratio to 2.9% next year, down 0.7 percentage points from this year’s 3.6%. The government seeks to institutionalize this “fiscal rule” through legislation in the National Assembly, which would cap the deficit at 3% of GDP.
However, some argue that the government’s fiscal outlook is overly optimistic, given the current state of tax revenues. Last year, South Korea faced a record-high tax shortfall of 50 trillion won due to weak corporate earnings, and this year’s tax revenues are set for a similar path. The government may need to issue more government bonds to cover the shortfall, further increasing the national debt.
In the government’s “2024-2028 National Fiscal Management Plan” released alongside next year’s budget, the government outlined its plan to maintain the fiscal deficit to GDP ratio at 2% from next year through 2028, in line with the yet-to-be-legislated “fiscal rule.”
Tax revenue remains an issue. The Finance Ministry expects to collect 382.4 trillion won in national tax revenue next year, which is 15.1 trillion won more than this year’s budget target of 367.3 trillion won. The government projects that corporate taxes, the primary cause of tax revenue shortfalls for two consecutive years, will bring in 88.5 trillion won next year, over 10 trillion won more than this year’s estimates. This optimism stems from forecasts that corporate earnings will improve next year, boosting dividend income taxes and income taxes by more than 2.2 trillion won as employment numbers rise. The government also expects value-added tax revenue to grow by more than 6 trillion won next year as domestic demand and private spending recovers.
“We expect tax revenue conditions to improve next year based on strong exports and improved corporate performance,” said Finance Minister Choi Sang-mok.
