National debt ratio set to top 50% in 2026 as fiscal spending grows

(Yonhap)

South Korea’s national debt-to-GDP ratio is projected to surpass 50 percent for the first time in 2026, two years earlier than previously forecast, as the government pursues aggressive fiscal expansion amid slowing economic growth and rising spending needs.

Two factors contribute to a rapid increase in the national debt ratio; one is when more money is spent than collected and two is when the rate of increase in debt is faster than the rate of economic growth. The government is trying to minimize the increase in debt by taxing evaded income, but many predict that fiscal soundness will inevitably be damaged for now as the expansionary fiscal policy is stronger.

The National Assembly said on Wednesday that according to the documents it received on June 23rd, the supplementary budget for 2025 under President Lee Jae-myung’s administration amounts to 30.5 trillion won ($22.3 billion). Combined with the first budget of 13.8 trillion won earlier this year, the additional fiscal injection is expected to accelerate the rise in the national debt burden.

According to the ‘National Fiscal Management Plan for 2024 to 2028’ document submitted by the government in 2024 while compiling the 2025 budget, the point at which the national debt ratio exceeds 50% was estimated to be 2028. It projected that the ratio would be 48.1% in 2025 and rise to 50.5% in 2028.

However, the first supplementary budget of 13.8 trillion won shortened the point at which the national debt ratio exceeds 50% by one year to 2027. The government revised its outlook for the national debt ratio to hit 50% in 2027 and rise to 50.6% in 2028 in the first supplementary budget. This outlook has been once more with the second supplementary budget, with the government forecasting that the national debt ratio will hit 50.3% in 2026 with the second supplementary budget, surpassing 50% for the first time. The point at which it will surpass 50% is two years earlier compared to the time of the original budget compilation in 2025, while it was also brought forward by one year from the first supplementary budget. Once the second supplementary budget is reflected, the national debt will increase from 1,273.3 trillion won in the original budget to 1,300.6 trillion won.

The government accordingly proposed two measures to secure the sustainability of mid- to long-term finances despite its expansionary fiscal stance. The Ministry of Strategy and Finance stated in its latest fiscal management plan that was submitted to the National Assembly, “We will seek measures to review and improve the mid- to long-term needs of mandatory expenditures along with the restructuring of expenditures,” adding, “We will strengthen efforts to expand the revenue base by reorganizing unnecessary and unnecessary tax exemptions and exemptions, rationalizing the tax system, and taxing evaded income.”

Reducing mandatory expenditures, which are statutory expenditures, could help secure fiscal capacity. The government is looking into local education finance grants, which are mandatory deductions of 20.79% of domestic taxes and allocated to local education budgets, as the first priority for restructuring as the school-age population declines but education finance grants increase. Grants account for about 20%, or 72 trillion won of the 365 trillion won mandatory expenditures for 2025.