Populist fiscal policy pledges add concerns over financial soundness

Bundles of 50,000 won banknotes are stacked at the Bank of Korea (BOK) headquarters in Seoul, Jan. 14, for distribution to the commercial banks ahead of the 2025 Seollal holiday in the last week of the month. Yonhap

An ailing Korean economy is facing greater concerns due to populistic spending pledges by major presidential candidates who vow to either give more cash handouts or to further cut taxes to woo voters, according to economists on Wednesday.

Central to such sugar-coated election promises is the aim to improve public livelihoods and encourage corporate investments.

But economists say that the pledges instead can deepen the deficit and national debt, cause tax shortfalls and harm other indicators of the country’s financial soundness at a time when it lags behind other major economies in growth.

Korea's economy contracted 0.24 percent in the first quarter this year, posting the weakest growth among the 18 OECD member states, plus China.

Global ratings agency Moody's hosts an Inside LatAm Colombia 2025 event in Bogota, Colombia, Tuesday. Reuters-Yonhap

“Korea is not safe from a possible downgrade of its sovereign credit rating, like the one suffered by the United States, but presidential candidates do not appear to be mindful of such sovereign risk,” said Shin Se-don, professor emeritus of economics at Sookmyung Women's University.

The professor referred to global ratings agency Moody’s lowering the U.S. sovereign credit rating by one notch to Aa1 from Aaa on Friday. The agency cited the increasing burden of the U.S. federal government’s budget deficit in its decision.

For Korea, the fiscal balance, or the difference between the government’s revenue and spending, has remained in the red for years.

In particular, the cumulative fiscal deficit from 2016 to 2025 is expected to reach 704 trillion won ($507.53 billion), after an extra 13.8 trillion won was allocated this month to boost the economy. The 704 trillion exceeds the previous estimation of 691.5 trillion won.

Fiscal deficits are mostly covered by issuing government bonds, which in turn increase the national debt.

The national debt exceeded 1,000 trillion for the first time in 2022 and is anticipated to grow to 1,280.8 trillion won this year. The amount will be equivalent to 48.4 percent of the country’s 2025 GDP, up from 45.9 percent in 2022.

The government posted tax revenue shortfalls for two straight years — 56.4 trillion won in 2023 and 30.8 trillion won in 2024 — as eased tax regulations backfired in the middle of weakened corporate earnings.

Despite this, Lee Jae-myung, the presidential frontrunner from the liberal Democratic Party of Korea (DPK), has pledged to expand the targeted age groups for child allowances from 17 years of age and under to age 18 and under. The pledge requires at least 100 trillion won, according to economists.

Kim Moon-soo, Lee’s opponent from the conservative People Power Party (PPP), promised to further loosen tax rules in the name of private-sector-driven economic growth.

“The time is not right to cut taxes, as a prolonged tax shortfall will only dent the government’s financial soundness,” Inha University economics professor Shin Il-soon said.

He pointed out that a dwindling population is another reason that presidential candidates should be prudent about “throwing out politically-motivated pledges because otherwise the government will run out of revenues.”