[Sukchul Hong Column] Do Not Pay Today’s Costs With Tomorrow’s Wallet

National Debt Interest Equals R&D Budget
Paying Off Debt Hinders Research
Mandatory Expenditures Like Pensions Need Overhaul
Universal Basic Pension Should Be Made More Targeted

According to the recently reviewed and approved “2025 Fiscal Year National Settlement Report,” the national debt exceeded 1,300 trillion won (1,304.5 trillion won) last year. This is an increase of 130 trillion won compared to the previous year. The ratio of national debt to gross domestic product (GDP) rose from 46% in 2024 to 49% last year. If the national debt continues to grow and surpasses 1,400 trillion won, the debt-to-GDP ratio is expected to exceed 50%. While the ratio is lower than those of Japan (250%), the United States (124%), and France (120%), and appears similar to Germany (65%) or Australia (52%), there is significant concern due to the steep rate of increase and the entrenchment of structural rigidity.

The key reason for the rapid increase in national debt is the sharp rise in mandatory expenditures mandated by law. Over the past decade, total government expenditures have increased by 1.9 times, but mandatory expenditures have surged by 2.3 times, from 182 trillion won to 415 trillion won. Looking at this year’s mandatory expenditure composition, statutory welfare spending—including the basic pension, public pensions, and health insurance support—exceeds 180 trillion won. Most of these are directly linked to the elderly population. In addition, local government transfers (local allocation tax and local education financial grants), which are tied to tax revenue, amount to 160 trillion won.

In particular, despite a decline in the school-age population, education grants that automatically increase spending are cited as a prime example of inefficiency in resource allocation. In addition, annual interest payments on accumulated national debt are approaching 30 trillion won. This amount is equivalent to the research and development budget, and interest payments on the accumulated national debt are threatening fiscal resources for future investment. The current fiscal structure is close to a wasteful practice of borrowing opportunities from future generations to cover present costs.

As demographic changes accelerate in the future, statutory welfare spending, which has been increasing by 6–8% each year, will snowball even further. This will erode discretionary spending for growth and investment. Ultimately, instead of opting for politically burdensome tax increases to secure additional fiscal resources, there is a high likelihood that the government will choose to expand national debt, which imposes less immediate burden and attracts less public attention. The problem is that demographic changes not only increase debt but also reduce the labor force and investment, thereby entrenching low growth.

The Korea Development Institute warns that growth rates could fall below 1% starting in the 2030s and that negative growth could become routine from the 2040s onward. Although the debt ratio may not exceed 60% by 2030, there is no room for optimism, as the shock of population aging and the decline in the working-age population will intensify after 2030. Meanwhile, the more structural rigidity becomes entrenched in public finances, the greater the astronomical social costs required to normalize the system. We must learn from the cases of heavily indebted advanced economies that fell back into the debt trap because they failed to resolve social conflicts during the process of fiscal efficiency reforms. Fiscal soundness is not just a matter of numbers, but the foundation for social sustainability.

Mandatory expenditures must be streamlined before it is too late. The basic pension, which is universally paid to the bottom 70% by income, should be shifted to a more selective and targeted system to control the pace of spending increases resulting from population aging. In addition, health care expenditures should be managed efficiently by improving the payment system for medical fees and expanding preventive health policies, thereby slowing the increase in government support for health insurance. Above all, it is urgent to reform education grants, which are automatically linked to a fixed portion of domestic taxes, and to break down the compartmentalized fiscal structure.

Finally, an “institutional brake” is needed to prevent indiscriminate spending driven by political interests. Fiscal rules should be introduced to keep the national debt-to-GDP ratio and the managed fiscal deficit below certain thresholds, and a “pay-as-you-go principle” should be enacted to require that new mandatory spending be accompanied by plans for financing. Fiscal innovation is no longer a matter of choice; it is an essential survival strategy for a super-aged society.

Seokcheol Hong, Professor of Economics at Seoul National University

Seokcheol Hong, Professor of Economics at Seoul National University

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