In May 2010, as Europe's fiscal crisis gathered force, Greece received a bailout worth 110 billion euros from the International Monetary Fund, the European Central Bank and other lenders. Its national debt had reached 127% of gross domestic product in 2009, or 1.8 times the euro zone average, and credit downgrades had left it unable to raise funds through bond sales. Greece avoided outright default, but the terms were harsh. Public-sector wages were cut and staff reduced, value-added, property and consumption taxes were raised, and pensions were slashed.
Even so, the Greek economy kept deteriorating. Unemployment jumped from 9.6% in 2009 to 27.5% in 2013, with youth unemployment at 50%, and many people lost their jobs. As public services in health care, education and social welfare were scaled back, vulnerable groups were hit first. The ranks of the destitute and homeless grew, the middle class collapsed and the gap between classes widened. Protests and general strikes followed, and highly educated young adults left the country in search of work. In 2015, power changed hands to a party campaigning against austerity. Greece shows that accumulated national debt does not merely stoke financial market instability — it can spread beyond the economy into political and social crisis. This is what is known as the backlash of debt.
Warning signs of rising government debt are still sounding around the world. On the 18th of this month, U.S. national debt topped $40 trillion for the first time. That is more than double the $19.9 trillion recorded in 2017, when Donald Trump's first administration took office, an increase over just nine years. Japan's national debt also passed 1,000 trillion yen in 2022 and surged to 1,342 trillion yen in 2025. Issuing more bonds to cover fiscal deficits pushes interest rates higher, and higher rates in turn swell interest costs — a vicious cycle now under way. It is no coincidence that the yield on 30-year U.S. Treasuries recently hit 5.31%, the highest in 19 years, and that the yield on 10-year Japanese government bonds reached 2.39%, a 30-year high.
What about South Korea? The state coffers appear to have caught their breath, having escaped the shortfalls that were a worry only a few years ago. Helped by the semiconductor super-cycle, national tax revenue reached 373.9 trillion won ($256 billion) last year, up 37.4 trillion won from a year earlier. In the first half of this year it came to 223 trillion won, a jump of 33 trillion won from the same period a year earlier. But it is too early to relax. A temporary revenue increase resting on one industry must not be mistaken for an improvement in fundamentals. Corporate earnings can turn at any time with the business cycle.
Even so, the government shows no sign of easing its expansionary fiscal stance. Total spending in this year's budget rose 8.1% from a year earlier to 727.9 trillion won, while total revenue grew just 3.6%, widening the managed fiscal deficit to 3.9% of GDP. National debt stands at 1,413.8 trillion won, or 51.6% of GDP. Next year's budget, now being drafted, is expected to be a record of more than 800 trillion won. Separately, the government has decided to use an estimated 160 trillion won or so in additional tax revenue to create a fund for future challenges.
There is nothing wrong with the government expanding fiscal spending to support the economy. If public money drives an industrial transformation in the age of artificial intelligence and lifts the potential growth rate, a temporary deficit can amount to an investment in the future. But expansionary spending must be calibrated to the economy's underlying strength. Sustained past a recovery, it can strain prices and fiscal soundness. It also affects monetary policy, including the central bank's interest rates. Moreover, South Korea is not a reserve-currency country that can print dollars without limit, as the United States can. If the fiscal base rests on volatile semiconductor revenue and the cycle turns, the resulting gap will have to be filled by issuing deficit bonds.
The backlash of debt does not arrive with blaring sirens. It creeps up quietly and strikes all at once the moment a threshold is crossed. The odds that South Korea will follow Greece's path anytime soon are low, but complacency is out of the question. Faith in fiscal omnipotence must be guarded against. This is the time to put everything into labor and pension reform and restructuring, rather than easy spending. Public finance is the nation's last line of defense. The greater the revenue windfall, the higher the fiscal seawall must be built. Strict fiscal rules should be written into law without delay to put a brake on politically motivated budget expansion. If the lesson that there is no free lunch is not taken to heart now, it may return as a fiscal crisis too heavy to bear.
