Fiscal strain builds as expansionary policy continues

By Jun Ji-hye

• Published Apr 10, 2026 7:00 AM KST

Moody's warns Korea's debt could top 60% of GDP by 2030, experts urge spending discipline

Concerns are growing over the country’s fiscal soundness as government debt topped 1,300 trillion won ($877 billion) in 2025, rising by about 130 trillion won in a single year to a record high, experts said Thursday.

Further adding to the concerns, the government is maintaining an expansionary fiscal stance, with additional supplementary budgets expected to put further pressure on public finances amid the prolonged Middle East conflict. The government projects the debt could climb to nearly 1,800 trillion won by 2029.

Experts warned that the most pressing concern is the pace of increase, underscoring the need for a balanced approach that maintains fiscal discipline while directing spending to priority areas.

According to the government’s 2025 fiscal year settlement report, which was approved Monday, government debt stood at 1,304.5 trillion won, up 129.4 trillion won from a year earlier. The figure exceeded the original budget estimate of 1,301.9 trillion won by 2.6 trillion won, marking an all-time high.

The debt-to-GDP ratio rose to 49 percent from 46 percent a year earlier and is approaching the 50 percent level, indicating that the country’s debt burden is increasing relative to the size of its economy. On a per capita basis, the debt amounts to about 25 million won per person.

Government debt refers to obligations the state is legally required to repay, including treasury bonds and other government-issued securities. When broader liabilities such as public pension obligations are included, total government liabilities rose to about 2,772 trillion won, up 185.9 trillion won from a year earlier.

Min Se-jin, a professor of economics at Dongguk University, said that while Korea’s debt level remains relatively low compared with other OECD countries, the speed of accumulation is a major concern.

“Since around 2019, government spending has increased sharply, and the debt ratio has risen at a rapid pace,” she said. “Given the inevitable fiscal pressures from population aging, this trend is widely seen as concerning.”

Government debt rose from the 600 trillion won range in 2016-2018 to 723.2 trillion won in 2019, then jumped to 846.6 trillion won in 2020 and to 970.7 trillion won in 2021 during the COVID-19 pandemic. It surpassed 1,000 trillion won for the first time in 2022, reaching 1,067.4 trillion won, and has continued to climb since.

The increase has been driven largely by expansionary fiscal measures aimed at supporting the economy. The Ministry of Finance and Economy said it had adopted proactive policies last year, including two supplementary budgets, to respond to overlapping challenges such as weakened domestic demand following disruptions linked to former President Yoon Suk Yeol’s martial law declaration and shifts in the global trade environment.

Gov't spending to increase further

Fiscal pressure is expected to intensify this year as the government continues its expansionary policy stance.

The 2026 budget was set at 728 trillion won, up 54.6 trillion won, or 8.1 percent, from the previous year — the largest increase on record. Government debt is projected to rise to 1,413.8 trillion won, with the debt-to-GDP ratio climbing to 51.6 percent.

A 26.2 trillion won supplementary budget has already been introduced in response to the war in the Middle East involving the United States, Israel and Iran. If the conflict drags on and prompts another supplementary budget in the second half, debt is likely to increase further with higher spending.

Under the government’s fiscal plan for 2025-2029, debt is projected to reach 1,523.5 trillion won next year, 1,664.3 trillion won in 2028 and 1,788.9 trillion won by 2029.

Moody’s called for fiscal reforms, warning that Korea’s debt ratio is likely to keep rising and could exceed 60 percent of GDP by 2030, posing a key risk.

The International Monetary Fund and the Bank for International Settlements have also cautioned that for non-reserve currency countries, fiscal space tends to shrink rapidly once debt levels approach 60 percent of GDP, weakening their ability to respond to economic shocks.

Experts stress that stricter fiscal discipline will be essential to ensure sustainable public finances over the medium-to-long term, particularly as spending continues to expand.

Kim Hag-soo, a senior research fellow at the Korea Development Institute, said that the country will require not only tighter control over discretionary spending but also structural reforms to mandatory expenditures, as well as efforts to strengthen the revenue base.

“With population aging, welfare-related mandatory spending is set to grow faster than nominal economic growth. Addressing the surge in future welfare demand will require multifaceted efforts,” he said.

“In the short term, discretionary spending should be used more efficiently, with resources reallocated from less urgent areas to priority sectors. Over the medium to long term, reforms to mandatory spending are needed, along with policy efforts to broaden the revenue base and ensure a fair distribution of the fiscal burden across generations.”