National Debt to Exceed 1,400 Trillion Won Next Year... Interest Payments to Surpass R&D Budget [Lee Administration's First Budget]

With the Lee Jaemyung administration shifting toward an expansionary fiscal policy, the national debt is expected to increase at an even steeper pace. Next year, the national debt will exceed 1,400 trillion won, and the interest cost on government bonds, which stood at around 2.8 trillion won last year, will surpass 3.6 trillion won. More money will be spent on repaying interest on the national debt than on the record-high research and development (R&D) budget. While fiscal authorities believe that a certain level of national debt increase is tolerable as part of proactive fiscal policy, concerns about fiscal soundness are growing due to the unprecedentedly rapid rise in national debt and the significant increase in borrowing costs.

According to the "2026 Budget Proposal" and the "2025-2029 National Fiscal Management Plan" announced by the Ministry of Economy and Finance on August 29, the average annual growth rate of total expenditure (5.5%) during the five years of the Lee Jaemyung administration (2025-2029) is expected to outpace the growth rate of total revenue (4.3%). With spending outstripping revenue, the managed fiscal balance is projected to post a deficit of 109 trillion won next year. Although this is a slight reduction from the 111.6 trillion won deficit in this year's second supplementary budget, the deficit will still exceed 100 trillion won. The managed fiscal balance is expected to remain in deficit by 110 trillion to 120 trillion won every year through 2029.

National Debt-to-GDP Ratio to Rise by 10 Percentage Points in Four Years
Government Bond Interest Costs to Increase from 3.6 Trillion to 4.4 Trillion Won

As fiscal deficits accumulate, national debt is expected to reach 1,415.2 trillion won next year, an increase of about 141.8 trillion won from this year's main budget (1,273.3 trillion won). After next year, national debt will continue to rise sharply, reaching 1,532.5 trillion won in 2027, 1,664.3 trillion won in 2028, and 1,788.9 trillion won in 2029. The national debt is thus projected to grow at an accelerating pace. The national debt-to-GDP ratio will exceed 50% next year, rising from 48.1% this year (49.1% based on the second supplementary budget) to 51.6%, and is expected to surge by 10 percentage points to 58.0% in four years. This means the national debt is growing faster than the economy itself.

As national debt increases, interest expenses on government bonds are also expected to surge. The government estimates that interest payments on government bonds will exceed 3.6 trillion won next year and reach 4.4 trillion won by 2029. Next year, the amount to be paid in interest alone will surpass the entire R&D budget of 3.53 trillion won.

Government Says "Manageable Level," but National Debt Growth Is Unprecedented

The Ministry of Economy and Finance maintains that the current level of national debt is "manageable," especially when compared to the average of major advanced economies (70-78% according to the International Monetary Fund) or the Group of 20 (G20) average of 83%. Jang Moonseon, Director General of Fiscal Policy at the Ministry, stated at a briefing the previous day, "The current national debt-to-GDP ratio of 50-58% is quite manageable for Korea's economic size when compared to the IMF and G20 averages." However, advanced economies such as the United States, Japan, and the United Kingdom, which are (quasi-)reserve currency countries, can increase their debt without the burden of rising interest rates due to strong demand for their government bonds and face relatively lower risks of credit rating downgrades. In contrast, Korea faces less favorable conditions for bond demand and interest rates, making the appropriate level of debt fundamentally different.

Korea has run fiscal deficits every year since the 2008 global financial crisis, and since the pandemic in 2020, the managed fiscal deficit has ballooned to around 100 trillion won annually, making it a chronic deficit country. The national debt-to-GDP ratio has more than doubled from 25.7% in 2008 to 51.6% next year, highlighting the unprecedented speed at which debt is growing. While a 50-58% ratio is not immediately threatening enough to trigger a credit rating downgrade, experts warn that a prolonged situation could increase the risk. Former Minister of Economy and Finance Yoon Jeunghyun emphasized, "Except for countries that have experienced fiscal crises, it is hard to find examples of debt growing this fast," adding, "For resource-poor countries like Korea, fiscal soundness is the most important measure of external credibility."

In this context, the Ministry of Economy and Finance has even removed the fiscal rule, which serves as a minimum safeguard to control debt. The managed fiscal deficit as a percentage of GDP is already at 4.0%, exceeding the 3.0% threshold, and is expected to widen to 4.4% by 2028. The fiscal rule sets a cap on the managed fiscal deficit at 3% of GDP per year and requires it to be reduced to within 2% if the national debt-to-GDP ratio exceeds 60%. The Yoon Sukyeol administration attempted to legislate the fiscal rule under the National Finance Act as part of its sound fiscal policy but failed. Under the Lee Jaemyung administration, references to the fiscal rule have been completely deleted from the National Fiscal Management Plan and the budget proposal.