Next Year's Budget 677 Trillion... Government Committed to Sound Finance 'Fiscal Rules' Enforced [2025 Budget Proposal]

The Yoon Suk-yeol administration has formulated next year's budget, the fourth year of its term, at 677.4 trillion won, a 3.2% increase from this year's 656.6 trillion won. Budgets increased in all 11 sectors except for social overhead capital (SOC), including research and development (R&D), health, welfare, employment, education, environment, and diplomacy and unification.

The government's budget growth rate for next year is higher than last year's record low of 2.8%, but lower than the initially planned 4.2%. It also falls far short of the government's expected nominal growth rate of 4.5% for next year. This is interpreted as a continuation of a 'fiscal tightening' stance, aiming to suppress spending as much as possible amid a situation where tax revenue shortfalls are expected for the second consecutive year.

On the 27th, the government held a Cabinet meeting chaired by President Yoon Suk-yeol to finalize the '2025 Budget Proposal' with these details and decided to submit it to the National Assembly on the 2nd of next month. The government's budget proposal for next year is 20.8 trillion won (3.2%) higher than this year. Initially, many inside and outside the government predicted that next year's budget expenditure growth rate would be in the 4% range. The medium-term fiscal plan announced last year had projected a 4.2% increase in expenditure for next year, but this was lowered by 1.0 percentage point. This reflects a strong will for fiscal normalization by curbing the total expenditure growth. Under fiscal conditions where tax revenue shortfalls are expected for the second year, the government plans to keep the deficit ratio of the national budget to GDP below the planned 3%.

Accordingly, the average total expenditure growth rate for the first three years of the Yoon Suk-yeol administration is 3.7%, less than half of the previous administration's first three years average of 8.6%, which pursued expansionary fiscal policy. Choi Sang-mok, Deputy Prime Minister and Minister of Economy and Finance, said, "The sustainability of fiscal policy deteriorated significantly during the response to the COVID-19 pandemic," adding, "We are in the process of normalizing this and strengthening fiscal sustainability."

To secure spending capacity amid fiscal tightening, the government carried out a 24 trillion won scale expenditure restructuring. The secured funds will be concentrated on four major areas: strengthening welfare for vulnerable groups such as the elderly, disabled, and vulnerable children; spreading economic vitality through R&D support; improving future resilience by expanding essential medical services and restoring regional healthcare; and investing in national defense, public safety, and natural disaster response.

Among the 12 sectors, the R&D sector saw the largest budget increase next year (11.8%). The R&D budget was expanded to a record high of 29.7 trillion won, up from last year's 29.3 trillion won, focusing on three major game changers and 12 strategic technologies. Health, welfare, and employment (4.8%), environment (4.0%), diplomacy and unification (3.7%), and education (3.5%) followed.

Within the health, welfare, and employment budget, a record-high investment of 1.7 trillion won was allocated to overcoming low birth rates by supporting work-family balance, and the budget for youth work experience support was increased by 46.9 billion won. A support fund of 25.2 billion won will be spent to pay employers 200,000 won per month when they compensate colleagues who assist with shortened working hours during childcare periods. Four hundred billion won will be allocated to expanding facilities and equipment for national medical schools due to medical school enrollment increases and loans for private medical schools.

Deputy Prime Minister Choi emphasized, "Our government did not spare necessary investments to solve urgent livelihood and socio-economic issues in next year's budget proposal," and added, "With national debt exceeding 1,200 trillion won, we will manage finances efficiently and strategically with a sense of responsibility for the heavier burden on future generations."

Next Year's Managed Fiscal Balance Deficit at 77.7 Trillion Won, 2.9% of GDP

The deficit in the national budget for next year is minimized to the lowest since 2019. The deficit ratio of the managed fiscal balance to GDP is targeted to fall within the government's proposed 'fiscal rule' limit of 2.9%.

Next year's total budget expenditure is 677.4 trillion won, and total revenue is 651.8 trillion won. The integrated fiscal balance, which is total revenue minus total expenditure, shows a deficit of 25.6 trillion won, equivalent to 1.0% of GDP. The managed fiscal balance deficit, which excludes the four major social security funds such as the National Pension from the integrated fiscal balance, is 77.7 trillion won, the lowest since 54.4 trillion won in 2019 during the Moon Jae-in administration. The managed fiscal balance deficit reached a record high of 117 trillion won in 2022, the first year of the Yoon Suk-yeol administration.

The managed fiscal balance deficit ratio to GDP is 2.9%, down 0.7 percentage points from this year's 3.6%. This is the first time it falls within the fiscal rule standard (3%) that the Yoon Suk-yeol administration is pushing to legislate. The fiscal rule's core is to maintain the managed fiscal balance deficit ratio to GDP within 3% annually. However, if the national debt ratio to GDP exceeds 60%, the managed fiscal balance limit is reduced to within 2%.

The government initially planned to add the fiscal rule to the National Finance Act emphasizing sound fiscal principles upon its inauguration, but the introduction was blocked in the 21st National Assembly. The Ministry of Economy and Finance stated, "Reflecting the discussions in the 21st National Assembly, we will continue legislative efforts to introduce the fiscal rule in the 22nd National Assembly."

The government plans to gradually improve the managed fiscal balance deficit ratio within 3% from 2024 to 2028. According to the '2024-2028 National Fiscal Management Plan' announced alongside the budget proposal, the managed fiscal balance deficit ratio target will gradually decrease from 2.9% next year to 2.7% in 2026, 2.5% in 2027, and 2.4% in 2028.

National Debt Swells to 1,277 Trillion Won... 48.3% of GDP

The government's tightening of fiscal belts is largely influenced by the skyrocketing national debt. Next year's national debt is projected to increase by about 71.2 trillion won from this year's 1,195.8 trillion won to 1,277 trillion won. The national debt ratio to GDP will slightly rise from 47.4% this year to 48.3% next year.

National debt has rapidly increased from 680.5 trillion won in 2018, 723.2 trillion won in 2019, 846.6 trillion won in 2020, 970.7 trillion won in 2021, 1,067.4 trillion won in 2022, to 1,134.4 trillion won last year.

The government plans to minimize the increase in the national debt ratio to GDP to 49.1% in 2026, 49.8% in 2027, and 50.5% in 2028, aiming to manage it at the low 50% range from 2028 onward.