South Korea has entered the global race toward expansionary fiscal policy alongside the United States, China and Japan, unveiling a budget proposal of 820.9 trillion won ($607 billion) for next year. Total spending will rise 12.8% from this year's main budget, surpassing the 10.6% increase in 2009, immediately after the global financial crisis.
The expansion is not a one-off. The government has set average annual spending growth at 8.4% through 2030, when total spending will reach 1,005.2 trillion won, opening an era of a 1,000 trillion won budget. Total spending will grow by about 332 trillion won during the five years of the Lee Jae-myung administration, roughly matching the 348 trillion won increase recorded across the three preceding administrations of Park Geun-hye, Moon Jae-in and Yoon Suk-yeol.
The expansion is possible because of tax revenue generated by the semiconductor boom. The government projects national tax revenue will reach 584.4 trillion won next year, up 194.2 trillion won from 390.2 trillion won this year. That far exceeds market forecasts of around 550 trillion won.
The problem is that there is no way to predict how long the chip boom will last. The managed fiscal balance, which reflects the government's actual fiscal position, will see its deficit shrink sharply from 107.8 trillion won this year to 3.1 trillion won next year, before widening steeply again to 100.8 trillion won by 2030. The deficit as a share of gross domestic product will rise from 0.1% next year to 2.9% in 2030, approaching the government's medium-term ceiling of 3%. Total spending will keep climbing while revenue growth remains limited.
Cho Yong-beom, vice minister of the Ministry of Planning and Budget, said the government cannot assume semiconductor tax revenue will continue, and that it had lowered the spending growth rate in stages. The projections, however, only assume slower revenue growth and do not account for a scenario in which next year's sharply higher revenue declines in absolute terms. National tax revenue is projected to rise 49.8% from this year's main budget and then increase every year through 2030.
The medium-term outlook is the government's baseline path, not a pessimistic scenario assuming delayed investment returns or a downturn in the chip cycle. If growth effects materialize later than expected, the goal of holding the managed fiscal deficit within 3% of GDP could be the first target to slip.
National debt will grow from 1,519.8 trillion won next year to 1,734.1 trillion won in 2030. The debt-to-GDP ratio is projected to stay relatively stable, rising from 48.3% to 49.0% over the same period. That assumes nominal GDP expands as planned, based on 2% real growth and the projected inflation path.
Total treasury bond issuance will amount to 222.8 trillion won next year, down 2.9 trillion won from this year's plan. Net new issuance, including deficit-financing bonds, will fall 13.1 trillion won to 96.3 trillion won, while issuance to repay maturing debt will rise 20.2 trillion won to 110.7 trillion won. Even as new borrowing declines, refinancing needs for existing bonds will keep total issuance in the 220 trillion won range. Rising yields add to the burden. The three-year treasury bond yield closed at 3.878%, up 0.925 percentage points from 2.953% at the end of last year.
Ultimately, analysts say Korea's fiscal health depends on whether the country can build a second industry on the scale of semiconductors. If the chip industry enters a full downturn in four to five years, the presence or absence of an industry able to absorb that shock could completely change the state of public finances.
Yang Joon-seok, a professor of economics at the Catholic University of Korea, said, "If we had turned the managed fiscal balance into a surplus while tax revenue was strong and reduced the debt burden further, we could have set ourselves apart from advanced economies facing growing fiscal instability, but we are missing that opportunity."
