Lee Jae-myung’s fiscal policy faces early test on sustainability

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Lee Jae-myung’s fiscal policy faces early test on sustainability

Published: 10 Jun. 2025, 00:03

Audio report: written by reporters, read by AI

Cho Min-geun

The author is the business and industry news editor at the JoongAng Ilbo.

President Lee Jae-myung begins his term under conditions strikingly similar to those that greeted the Moon Jae-in administration eight years ago. Both leaders came to power through snap elections following the impeachment of their predecessors. Both began governing without a transition team. And in both cases, U.S. President Donald Trump was already in office in the United States, reshaping the global economic and security order.

But one key difference lies in the economic backdrop.

Lee Jae-myung, leader of the Democratic Party, left, presents a gift to former President Moon Jae-in in Moon's residence in South Gyeongsang on Jan. 30. [DEMOCRATIC PARTY]

When Moon took office in 2017, the Korean economy was relatively resilient despite political turbulence. Global conditions were improving. The Kospi was climbing toward record highs. The Bank of Korea (BOK) revised its growth outlook upward. Tax revenues outpaced projections. The Moon government’s first move was to pass a supplementary budget, which became an annual tradition. In total, the administration implemented 10 supplementary budgets worth 150 trillion won ($110.8 billion) over five years, bolstered by emergency spending during the pandemic.

In contrast, the Lee administration inherits a much tougher fiscal landscape. Korea is grappling with sluggish exports due to global tariff disputes, while domestic demand remains weak. The BOK has downgraded its growth outlook to below 1 percent. Meanwhile, a tax revenue shortfall of nearly 90 trillion won over the past two years has left government coffers depleted.

U.S. President Donald Trump holds a chart next to U.S. Secretary of Commerce Howard Lutnick as Trump delivers remarks on tariffs in the Rose Garden at the White House in Washington on April 2. [REUTERS/YONHAP]

Theoretically, the government could borrow more. But financial markets are unstable. In recent months, bond markets have sent alarming signals, rattling even the finance ministers of reserve currency countries. The turbulence began in the United States, where President Trump’s aggressive tariffs triggered inflation fears and investor anxiety. U.S. Treasury yields surged as markets began anticipating both slower growth and higher prices. The resulting jump in interest rates increased debt-servicing costs and dragged on the broader economy. Even Trump, who remained unmoved by plunging stock prices, eventually backed down in the face of surging bond yields.

Yet confidence in bond markets remains shaky. Long-term interest rates in the United States are still elevated. Yields in traditionally safe havens like Japan and Germany have also spiked. Analysts warn that “bond vigilantes” are back, scrutinizing government spending more closely.

Korea may appear relatively stable, but that assumption deserves scrutiny. Unlike the United States and Japan, Korea does not issue a reserve currency. According to the International Monetary Fund’s recent Fiscal Monitor, Korea’s general government debt will reach 54.5 percent of its GDP this year, slightly above the average for 11 nonreserve advanced economies. More concerning is the projected pace of debt accumulation. Korea’s debt-to-GDP ratio is expected to hit 59.2 percent by 2030, the second-fastest increase among the 11 countries surveyed.

In other words, even the “priming pump” of fiscal policy may be running dry. The Lee administration has already begun discussing a supplementary budget, and long-term bond yields in Korea have started to rise in response. Given the growth outlook and the added economic strain following last year’s martial law crisis, some targeted spending may be unavoidable, particularly for vulnerable households and small businesses.

Still, indiscriminate fiscal expansion could backfire. Stimulus without discipline might drive up prices and real estate values, provoking public resentment over perceived imbalances in who benefits and who ultimately pays.

The size and composition of any stimulus package must be approached with caution. Additional debt should be kept to a minimum. Instead, the government should focus on reducing wasteful spending and reallocating funds more efficiently. Any new spending must be structured to promote productive investment and job creation, ensuring a virtuous cycle in the economy.

The headquarters building of the Ministry of Economy and Finance in Sejong [MINISTRY OF ECONOMY AND FINANCE]

This is not merely about fiscal restraint. The credibility and sustainability of the Lee administration’s economic program are on the line. The government must send a clear message to markets that its fiscal policy is not about short-term relief, but long-term transformation. Stimulus must be tied to restructuring and productivity gains.

This commitment is embedded in President Lee’s own policy platform. His campaign pledged “genuine growth,” defining it not as artificial or temporary stimulus but as structural improvement and innovation that enhances the nation’s growth potential. Encouragingly, the newly formed economic team within the presidential office appears capable of executing this vision.

What remains is leadership — through both resolve and execution.

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