[Inside Chodong] Another Gray Rhino: The ‘Populist Pledge’

Tens of Trillions in Post-Election Pledge Bills Await
Fiscal Deficit Set to Widen Regardless of Who Wins
Both Ruling and Opposition Parties Must Prioritize Passage of the National Finance Act

The results of the April 10 general election will be announced in exactly one week. Either the ruling party, which has called for a ‘judgment on the ruling party,’ or the opposition party, which has called for a ‘judgment on the government,’ will become the majority party, but it is still too early to predict the outcome. The situation can easily fluctuate in the remaining week depending on slip-ups or the direction of the legislative conflict over medical school expansion. Another variable is that about 20% of voters remain undecided.

Nevertheless, there is one common scenario that will unfold after the April 10 general election. Regardless of which side holds power, the fiscal deficit will inevitably expand. Although the government has announced through the ‘2025 Budget Formulation and Fund Operation Plan Guidelines’ that it will maintain a sound fiscal stance by arbitrarily reducing ‘discretionary spending,’ which is a budget that can be cut by more than 10%, various expenditures will inevitably increase due to the populist pledges made during the election period.

According to the ‘2023?2027 National Fiscal Management Plan’ announced by the Ministry of Economy and Finance, the deficit ratio of the management fiscal balance to GDP in 2025 is 2.9%. This barely meets the government’s goal of managing the national fiscal deficit ratio within 3% of GDP. However, the catch is that recent tax cut measures such as the abolition of the financial investment income tax and the extension of the temporary investment tax credit are not reflected here. To make matters worse, if the ruling party’s pledges announced during the election period, such as tuition exemption for multiple children and raising the threshold for simplified VAT taxpayers, as well as President Yoon Suk-yeol’s public discussion on livelihood issues, are added, the government’s goal could become an ‘empty promise’ that is never fulfilled during the term.

The opposition party is no different. The Democratic Party of Korea has promised to provide a ‘livelihood recovery support fund’ of 250,000 won per person and an average of 1 million won per household, which is estimated to require about 13 trillion won (according to the Democratic Party). Although Democratic Party leader Lee Jae-myung claims that this can be secured by issuing government bonds or adjusting the existing budget, we must spend more than 27.4 trillion won this year alone on interest payments for government bonds. In a reality where both fiscal revenue and expenditure situations are challenging, it is not easy to newly secure such a budget.

What is more problematic is that as the election day approaches, both sides are encouraging populist pledges. If the country’s treasury leaks due to tens of trillions of won worth of pledges that will pour out after the general election, it will be difficult to maintain national competitiveness. The national finances will go bankrupt, and the country will lose its status as a developed nation. This is not something to dismiss as merely a ‘scenario’ that causes excessive fear. Warnings about the accumulated fiscal deficit are already coming from various quarters. The Budget Office analyzed in its long-term fiscal outlook that national debt could exceed 192% of GDP around 2070, and the International Monetary Fund (IMF) pointed out in its annual consultation report on Korea that public sector debt could rise to about 200% of GDP by 2075.

To prevent populist pledges from becoming a gray rhino (a highly probable and impactful risk that people overlook) after the general election, the introduction of a fiscal rule that enforces the fiscal deficit to remain within 3% of GDP is essential. In this regard, the first thing the ruling and opposition parties should do after the general election is to pass the amendment to the National Finance Act submitted to the National Assembly in September 2022. Fiscal rules also have the justification of being laws for future generations.

These days, the warning from Ken Griffin, CEO of Citadel and a Wall Street hedge fund king who directly addressed the U.S. national debt issue by saying, “We must stop borrowing that sacrifices future generations,” does not sound like someone else’s story.

This content was produced with the assistance of AI translation services.