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Korea’s next president inherits fragile finances amid structural pressures

Published: 15 Apr. 2025, 00:03

Bae Kook-hwan

The author is Chairman of Korea Institute of Public Finance Performance and Former Second vice minister, Ministry of Economy and Finance

With Korea’s snap presidential election set for June 3 following the Constitutional Court’s removal of President Yoon Suk Yeol from office, the incoming administration will assume power without delay. Unlike typical elections, the new president will take office immediately after the vote, leaving no room for a transition period. As soon as the election concludes, the new administration will be tasked with translating campaign promises into policy agendas for the next five years.

At the core of that process lies a pressing and unavoidable issue: the state of the national budget. Campaign pledges, no matter how ambitious or visionary, can only materialize if supported by a sound and sustainable fiscal framework. Yet recent data suggest the government’s financial footing is more fragile than it appears.

From left: Financial Services Commission Chairman Kim Byoung-hwan, Finance Minister Choi Sang-mok, Bank of Korea Gov. Rhee Chang-yong and Financial Supervisory Service Gov. Lee Bok-hyun pose for a photo during a meeting in Jung District, central Seoul, on April 4. [MINISTRY OF ECONOMY AND FINANCE]

A Mounting Deficit Without a Crisis
In its annual report released on April 8, the Ministry of Economy and Finance revealed that Korea ran a managed fiscal deficit of 104.8 trillion won ($73.4 billion) in 2023. This marked the third time in recent history that the annual deficit has exceeded 100 trillion won, following similar figures in 2020 and 2022 during the height of the Covid-19 pandemic. What makes this recent shortfall more troubling is that it occurred absent any comparable external crisis.

The managed fiscal deficit, which reflects the government’s revenue shortfall relative to total spending, accounted for 4.1 percent of GDP, far exceeding the 3 percent ceiling set under the government’s own fiscal guidelines. That breach highlights the growing imbalance between revenue and expenditure.

Eroded Revenue Base from Tax Cuts
The primary driver of this fiscal gap has been a sharp decline in tax revenue. In 2023, actual collections fell short of estimates by 30.8 trillion won. This reversal is particularly stark when compared to 2022, when the government recorded a tax surplus of 52 trillion won shortly after the Yoon administration took office.

Much of the shortfall can be attributed to a series of tax cuts introduced by the government, including reductions in corporate taxes and the comprehensive real estate tax. The administration also enacted temporary tax incentives such as investment tax credits. These measures were introduced on the assumption that lower taxes would stimulate investment and job creation, ultimately broadening the tax base over time.

However, the anticipated virtuous cycle failed to materialize. Instead, the tax base weakened considerably, creating an even more constrained fiscal environment for the next administration. Despite repeated claims of fiscal prudence, the Yoon government left behind a structure in which spending remains elevated while revenue streams have diminished.

A Closer Look at Debt Metrics
To evaluate the long-term sustainability of Korea’s finances, economists typically examine two indicators: the fiscal balance and the national debt relative to GDP. Korea’s national debt is measured in three tiers — central government debt, general government debt (D2) and public sector debt (D3). Among these, D2, which includes the debt of nonprofit public institutions, is favored by international organizations like the International Monetary Fund and Organisation for Economic Cooperation and Development (OECD) for comparative analysis.

At present, Korea’s general government debt stands at approximately 60 percent of GDP. This figure is relatively low compared to the Organisation for Economic Cooperation and Development average of 115 percent, suggesting that Korea’s public finances remain stable — on the surface. Yet this picture changes upon closer inspection.

A revised version of the 2025 national budget bill passes during the 418th regular session at the National Assembly in Yeouido, Seoul, on the afternoon of December 10, 2024. [News1]

Korea is aging faster than almost any other developed nation. Its working-age population is shrinking, while demand for social spending is rising. These demographic trends, combined with a declining potential growth rate, pose long-term risks to fiscal stability. Notably, national debt has increased by more than 10 percentage points relative to GDP in the past five years, reaching 1,175 trillion won in 2023. If left unchecked, this trajectory could erode Korea’s fiscal credibility.

Limited Headroom for Public Burden Sharing
Korea’s tax-to-GDP ratio — commonly referred to as the public burden rate — remains relatively low at around 29 percent, compared to the OECD average of 36 percent. While this suggests some theoretical room for increased contributions, raising taxes remains politically and socially contentious. Furthermore, the difficulty of reversing tax cuts once enacted limits fiscal flexibility.

The Yoon administration, while emphasizing fiscal discipline, failed to achieve its stated targets. At the 2022 National Fiscal Strategy Meeting, President Yoon criticized previous administrations for what he described as excessive pandemic-era spending and pledged to restore fiscal discipline. Despite these assertions, the government never met its 3 percent deficit target and pursued tax cuts that further undermined revenue.

This disconnect between rhetoric and policy raises questions about the administration’s overall fiscal strategy. Simply distributing funds without strategic prioritization cannot be equated with governance. In the last three years, Korea’s budget lost much of its strategic capacity, with spending decisions driven more by political expediency than national interest.

Urgency of Fiscal Overhaul
With Korea’s annual budget nearing 700 trillion won, the next administration must urgently redefine its fiscal strategy. The National Fiscal Strategy Meeting, expected in June or July, will be a critical forum for charting the nation’s fiscal path forward.

To prepare, the incoming government must confront a painful reality: the current budget structure is unsustainable. Indicators across the board, from fiscal balances to debt accumulation, signal growing vulnerability. Reform is inevitable.

Historically, Korea has conducted large-scale spending overhauls roughly every decade, cutting inefficient programs even at the risk of public backlash. Similar efforts are now needed to address populist expenditures, politically motivated subsidies, legacy programs with entrenched interests and projects that persist without measurable outcomes.

A genuine reset may require a zero-based budgeting approach, free of political calculus and focused on long-term national priorities. Despite repeated promises to restructure spending, the current government made little headway. The reasons for this failure must be critically reviewed.

Fiscal reform, by its nature, involves rolling back existing benefits — an unpopular and politically risky task. For reform to succeed, strong leadership is essential. Korea’s successful budget reforms during the Fifth Republic were possible only because the presidency granted full power to fiscal authorities. A similar level of institutional backing may be necessary again. In fact, the next president could consider relocating budget control to the presidential office, mirroring the U.S. Office of Management and Budget to better align fiscal policy with executive priorities.

Prioritize Recovery Before Fiscal Discipline
Finally, fiscal soundness, while important, must not become an end in itself. Korea is facing economic stagnation, compounded by export challenges stemming from U.S. President Donald Trump’s tariff-centered trade policy. In such times, excessive focus on deficit reduction can stifle recovery.

Fiscal rules should be suspended until economic conditions stabilize. What Korea needs now is not rigid adherence to balance sheets, but a pragmatic use of public finance to support growth, investment and social cohesion. The new administration should prioritize economic stabilization, then gradually rebuild fiscal discipline on a stronger foundation.

Translated from the JoongAng Ilbo using generative AI and edited by Korea JoongAng Daily staff.