Last year, South Korea’s national debt increased by almost 60 trillion won ($43.8 billion) to 1,126.7 trillion won ($822.7 billion). For the first time, the debt-to-GDP ratio went over 50%, reaching a record 50.4%. Due to the reduction in tax revenues, the country’s finances recorded a deficit of $63.6 billion for the year, which was about $21.2 billion more than the initially forecasted $42.4 billion (based on Operational Fiscal Balance) presented in the government’s budget plan.
Due to this, the fiscal deficit ratio to GDP of the country reduced from 5.4% in 2022 to 3.9%. However, it still exceeded the European Union’s (EU) sound financial management recommendation of 3.0%. This indicates that the rapid fiscal deterioration that began during the former Moon Jae-in administration is continuing.
Last year’s fiscal balance of the nation was organized and executed under the Yoon Suk-yeol administration, which solely reflects the current government’s performance. President Yoon criticized the previous administration for causing the national debt to surpass $730 billion through “ill-advised populism”, but he himself failed to uphold the principle of sound fiscal management rigorously.
Despite President Yoon having reduced discretionary spending, a downturn in the economy and a slump in real estate led to a decrease of $37.3 billion in national tax revenue and a $18.2 billion decrease in non-tax revenue, resulting in a deficit. The announcement of last year’s financial close was unusually delayed by a day past the Apr. 10 deadline specified by the National Finance Act, likely postponing the release of negative indicators of the government because it might affect the result of the general election.
The consequences of the populist policies promised by both the ruling and opposition parties during the general election are now becoming apparent. The ruling party pledged to implement various tax cuts, including a reduction in value-added tax on essential goods, the withdrawal of financial investment income tax, and an expansion of child tax credits.
President Yoon has held 24 discussions on livelihood issues this year alone, announcing policies that require substantial resources, such as underground railway projects, expanding the scope of national scholarships, and constructing a Korean version of the Autobahn.
The opposition party, the Democratic Party of Korea, released different policies, including handing out cash to citizens, such as a $182 livelihood support payment for every citizen, a monthly payment of $146 for children aged 8 to 17, and full scholarships for national and junior colleges. With a significant majority, the opposition party is expected to demand the allocation of a supplementary budget to fulfill the $9.5 billion worth of promises for livelihood support payments.
The promises made by both ruling and opposition parties during the general election, along with the policies announced by the president to address livelihood issues, should be implemented only if they fall within the government’s financial capacity. Due to the worsening fiscal conditions, the government should prioritize spending on urgent policies such as countermeasures for low birth rates and securing growth engines.
