Korea faces pressure to abandon austerity amid growing economic downside risks

A worker sprays water to clean ash off a tree at a pine forest in Andong, North Gyeongsang Province, Monday, after the country's worst-ever wildfire devasted the region. Yonhap

A host of economic downside risks, including U.S. President Donald Trump's tariffs, are weighing heavily on Korea to abandon its belt-tightening fiscal stance as it rapidly loses growth momentum, according to analysts on Thursday.

They said a 26 percent U.S. reciprocal tariff imposed on imports from Korea and the country's worst-ever wildfires in the southeastern region last month are anticipated to exacerbate sluggish consumer spending.

The economic loss from the blaze is estimated to be more than 1 trillion won ($680.73 million), affecting numerous farmers and households.

The government is expected to continue struggling with a growing shortfall in tax revenue for the third straight year in 2025, given the pace of tax collection in the first two months of the year.

As of February, the government collected only 15.9 percent of its planned taxable income for 2025, lower than the 16.8 percent average in the January-February period for the past five years.

Finance Minister Choi Sang-mok makes an announcement on a supplmentary budget worth 10 trillion won ($6.82 billion) during an emergency meeting of economy-related ministers at Goverment Complex Seoul, Sunday. Yonhap

“The external and internal risks to the Korean economy and the government’s lack of tax revenue to counter such risks suggest that the extra budget is essential and that budget-tightening policy may be no longer sustainable,” said Shin Se-don, professor emeritus of economics at Sookmyung Women's University.

Shin said the national debt will likely grow bigger in the coming years than the Ministry of Economy and Finance's estimate announced in 2024.

At that time, the ministry did not consider allocating a supplementary budget and projected the national debt would grow from 1,195.8 trillion won in 2024 to 1,277 trillion won in 2025, 1,353.9 trillion won in 2026 and 1,432.5 trillion won in 2027.

The proportion of national debt to gross domestic product was estimated to be 47.4 percent in 2024 but is forecast to surpass 50 percent by 2028.

Despite the snowballing national debt, an economist from a private think tank said moving away from the current belt-tightening policy “is unavoidable for the national interests, as failing to resolve economic risks in a timely manner will result in a bigger financial burden.”

The economist said on condition of anonymity that the government should put more than 10 trillion won into an extra budget as proposed by Finance Minister Choi Sang-mok on Sunday.

Choi said 10 trillion won will be spent to respond to disasters and accidents, strengthen trade and AI capabilities and provide financial support for people's livelihoods.

Yoo Ho-lim, a professor of taxation at Kangnam University, added that 35 trillion won would be adequate to enliven the affected businesses and individuals.

The amount was in line with repeated demands from the main opposition Democratic Party of Korea.

“I’d say the economic uncertainties we face are as volatile as we experienced in past crises, including the 1997-98 Asian Financial Crisis and the COVID-19 pandemic era,” Yoo said. “The government should not hesitate to spend a corresponding amount of cash to salvage affected parties.”