Mandatory Spending Growth Outpacing Discretionary Expenditure Expected as Key Issue in National Audit

Rising Costs of Four Major Pensions and Health Insurance
Increased Burden of Local Allocation Tax and Education Grants
Effectiveness of Expenditure Restructuring Under Scrutiny

As the government's fiscal burden to address low birth rates and an aging population continues to grow, concerns are being raised that mandatory expenditures, which are increasing more rapidly than discretionary spending, threaten the sustainability of public finances. Although the government is making annual efforts to ensure fiscal soundness through expenditure restructuring and other measures, criticism persists that these efforts have not produced substantial results. It is expected that the management of mandatory expenditures and the effectiveness of expenditure restructuring will be key issues in the first National Assembly audit under the Lee Jaemyung administration.

The National Assembly Research Service recently selected "measures to manage the rapid increase in mandatory expenditures" as a key question the government must answer in its "2025 National Assembly Audit Issue Analysis Report." Mandatory expenditures refer to budget items that the government is legally required to spend. These include the four major public pensions (such as the National Pension and Government Employees Pension), health insurance, local allocation tax, and local education grant. Due to the increase in pension recipients caused by an aging population and the expansion of welfare spending, the rate of increase in mandatory expenditures is accelerating every year.

According to the Ministry of Economy and Finance's "2024-2028 National Fiscal Management Plan," last year, out of the government's total expenditure of 656.6 trillion won, mandatory expenditures accounted for 347.4 trillion won, or 52.9% of the total. The average annual growth rate is 5.7%, which is significantly higher than the growth rate of discretionary spending (1.1%) over the same period. If this trend continues, mandatory expenditures are projected to reach 433.1 trillion won by 2028, accounting for 57.3% of total spending.

Among mandatory expenditures, statutory welfare spending accounts for the largest share at 48.7%. This is due to the sharp increase in health insurance and pension payments for the elderly. This year, the national debt-to-GDP ratio, based on the second supplementary budget, stands at 49.1%. However, if the expansion of mandatory expenditures continues, projections suggest that this ratio could soar to 173.0% by 2072, which is considerably higher than that of major advanced economies today.

To cope with the growing burden of mandatory expenditures and debt, the government has been carrying out expenditure restructuring every year. According to the Ministry of Economy and Finance, the scale of expenditure restructuring, based on the main budget, increased from 11.5 trillion won in 2018 to 24 trillion won last year, more than doubling. Next year, it is expected to reach a record high of 27 trillion won.

The problem is that the government has so far focused expenditure restructuring on reducing discretionary spending, leading to skepticism about its actual effectiveness. In fact, according to the Board of Audit and Inspection, 37.9% of the expenditure restructuring consisted of simply postponing budget execution, while 30.5% was due to natural decreases. Only 20.1% involved fundamental improvements to project structures or responses to changes in demand. Ultimately, the assessment is that these measures merely delayed execution or were automatically adjusted due to revenue changes. Kang Sungjin, a professor of economics at Korea University, said in a phone interview, "Simply delaying expenditures has only a short-term effect of reallocating resources," and added, "It is necessary to clarify the criteria to ensure that structural improvements through institutional reforms continue."

Another issue is the slow pace of discussions on major social issues such as pension reform or health insurance restructuring, which are significant components of mandatory expenditures. As demand for medical, health, and welfare spending continues to rise, the burden of interest payments resulting from increased national debt is also growing. Last year, government interest payments accounted for 7.8% of spending and are expected to increase by an average of 8.0% annually.

The local allocation tax and local education grant, which make up a significant portion of mandatory expenditures, are also expected to become focal points of debate. These funds are designed to be linked to domestic tax revenues, making it difficult for the government to reduce them at its discretion. Recently, there have been discussions about adjusting the linkage rate of the local education grant to domestic tax revenues, as well as proposals to integrate the local allocation tax and education grant. It is reported that the government is also reviewing these issues internally.

However, since restructuring must be pursued without undermining the principles of local autonomy and educational autonomy, there are significant practical limitations. Some have expressed concerns that efforts by the central government to secure fiscal soundness could inadvertently weaken local autonomy and lead to further conflict.

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