Despite Fiscal Stimulus, the Economy Remains Stagnant; Structural Reform Needed for the Long Haul [Lee Jaemyung Administration 100 Days]

The Lee Jaemyung administration, which launched with a pledge to fight the economic downturn, has spent the past three months rapidly rolling out a series of economic policies, including a supplementary budget to boost the economy, a growth strategy, tax reforms, and the national budget. In the short term, the government has injected fiscal resources to revive the sluggish economy, while in the medium to long term, it has unveiled a national vision and major economic policies focused on growth, emphasizing a state-led role in fostering advanced strategic industries such as artificial intelligence (AI). Experts have noted that the administration faced significant challenges due to both domestic and international factors threatening the Korean economy, such as low growth and tariff shocks from the United States. However, they also pointed out that the government has fallen short in addressing fiscal soundness concerns and pursuing structural reforms, issues that have been controversial since the administration's inception.

President Lee Jae-myung is delivering the government's policy speech on the second supplementary budget for 2025 at the second plenary session of the 426th National Assembly (extraordinary session) held at the National Assembly in Yeouido, Seoul, on the morning of the 26th. Photo by the National Assembly Press Photographers Group

Government Launch and Negotiation Settlement... The Biggest Uncertainty for the Korean Economy Removed

When President Lee Jaemyung took office in June, the United States was threatening Korea and the rest of the world with tariffs, while major economies such as the European Union were responding forcefully, escalating the global tariff war. Trade diplomacy was urgently needed to shield Korean companies and the economy from collateral damage. However, in the wake of martial law, both the Prime Minister and the Deputy Prime Minister for Economic Affairs had resigned, leaving the fourth-ranking cabinet member to lead the country in an unprecedented, triple-acting government, resulting in a diplomatic vacuum that lasted for over a month. Despite entering negotiations late, the Lee administration succeeded within two months in securing tariff rates for Korea that were equal to or lower than those of other major exporters to the United States. Jung Kyuchul, Director of Economic Outlook at the Korea Development Institute (KDI), commented, "Successfully concluding trade negotiations with the U.S. under tight deadlines has removed the greatest uncertainty for our economy, which is a positive achievement." Although the process of reaching a bilateral agreement on detailed implementation plans for the $350 billion U.S. investment package, including MASGA, remains, many agree that the administration has laid the groundwork for trade stability in broad terms.

Having overcome the initial challenge of tariff negotiations, the Lee Jaemyung administration is now focusing on finding a breakthrough to escape the prolonged period of near-zero growth. The government's agenda of technology-driven growth, led by the private sector and centered on AI, is generally viewed as a positive move to reverse the declining growth trend. When asked to rate the administration on a scale of 1 to 5, experts unanimously gave it a 4. Kang Sungjin, Professor of Economics at Korea University, remarked, "At a time when Korea needs to transition from a catch-up model to a technology-leading model, the decision to increase the research and development (R&D) budget to a record 35.3 trillion won, reversing the cuts made during the Yoon Sukyeol administration, was timely." However, regarding the creation of a 100 trillion won National Growth Fund, which involves both private capital such as pension funds and a strategic industry fund led by state-run banks, he added, "It is unclear whether the government, which emphasizes private sector-led growth, intends to foster industries through state-led initiatives, making the fund's true nature ambiguous. For this reason, it falls short of a perfect score."

Despite advocating for private sector-led growth, the administration has faced criticism for pushing ahead with anti-business laws such as the amendment to the Commercial Act and the so-called "Yellow Envelope Law" (amendments to Articles 2 and 3 of the Trade Union Act), which are seen as contradictory. Kim Jeongsik, Professor Emeritus of Economics at Yonsei University, pointed out, "For growth, companies need to take the lead, but the government is instead introducing policies that constrain corporate activity and investment." He continued, "Rather than prioritizing political issues to shore up the party's support base, the government should focus first on increasing corporate investment and boosting growth for the sake of the national interest." Kang Minseong, Professor of Public Administration at Kyung Hee University, also noted, "Regulation of large corporations is being implemented too radically without sufficient consideration of the consequences."

Lee Jaemyung's Populist Spending Missed the Opportunity for Growth

On his first day in office, President Lee demonstrated the gravity of the economic crisis by issuing his first executive order to establish an "Emergency Economic Response Task Force" and convening its inaugural meeting. The Korean economy's growth rate plummeted to -0.2% (quarter-on-quarter) in the first quarter of this year, and the economy has hovered around 0% growth for five consecutive quarters, indicating deepening stagnation. The Lee administration, insisting that even increased national debt should be used as fiscal leverage to revive the economy, poured 31.8 trillion won (as confirmed by the National Assembly) into the economy through supplementary budgets and measures such as issuing consumption coupons, as promised during the presidential campaign. However, the administration set this year's GDP growth target at just 0.9%. This is half the 1.8% forecast made in January and falls well short of the estimated potential growth rate of 1.9%.

Kim Sangbong, Professor of Economics at Hansung University, commented, "The expansion of local currency, which has a low fiscal multiplier, is not a fundamental solution to boosting domestic demand. Japan's experience since the 1990s shows that excessive monetary stimulus failed to revive the economy and only led to a mountain of debt." He added, "Resources should have been allocated to sectors with strong industrial linkages and sustainable growth potential, such as construction, to lay the foundation for economic recovery." This criticism points to the missed opportunity for growth due to one-off consumption coupons. Nevertheless, in its first budget proposal announced at the end of last month, the Lee administration unveiled a raft of fiscal policies, including an increase of 2.7 trillion won for pilot projects on basic income in rural areas and expanded child allowances, as well as an additional 1.2 trillion won to support the issuance of regional gift certificates.

The difficulty in reviving the economy through fiscal stimulus alone stems from Korea's structural issues, such as demographic changes caused by low birth rates and rapid aging, as well as household debt. As government spending and national debt soar due to rapid aging, the sharp decline in the growth rate is further eroding fiscal capacity. However, the government failed to address how it would offset declining revenues alongside rising expenditures in its first supplementary budget and main budget proposals. Lee Yoonsu, Professor of Economics at Sogang University, pointed out, "Reform of the local education grant, which generates surpluses every year, was not even discussed due to political entanglements among stakeholders." He warned, "If bold structural reforms are set aside in favor of fiscal omnipotence, the burden of unsustainable debt will fall on future generations." He added, "The administration should drive policy efforts early on toward deregulation, structural reform, corporate growth, and fiscal efficiency."