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Korea's deficit-financed debt projected to exceed 1 quadrillion won next year

Published: 01 Sep. 2025, 15:40 Updated: 01 Sep. 2025, 19:21

A file photo of national debt [YONHAP]

For the first time, Korea's debt from deficit financing — government liabilities that must be repaid with taxpayer money — will surpass 1 quadrillion won ($718.4 billion) next year. The surge stems from a record 728 trillion won budget plan for 2026 that leans heavily on deficit bond issuance.

Experts warn that mandatory spending, such as basic pensions and child allowances, will inevitably expand in the years ahead, further burdening future generations.

Total national debt will rise to 1.4 quadrillion won in 2026, according to the Ministry of Economy and Finance on Sunday. Of that, deficit-financed debt will grow from 924.8 trillion won this year to over 1 trillion won next year, making up 72.7 percent of total debt — the highest ratio ever recorded.

Deficit financing is often described as a "low-quality" way to incur debt. Unlike financial debt, which is backed by corresponding assets that can be used for repayment, deficit-financed debt is incurred through bond issuance to cover budget shortfalls and must be repaid through future tax revenue.

In other words, it is borrowing to fill a revenue gap that cannot be covered by government income alone.

The government plans to issue 110 trillion won worth of deficit bonds in 2026 alone. Interest payments on government bonds will reach 36.4 trillion won next year and are projected to climb to 44 trillion won annually by 2029. While this accounts for just 1.3 percent of the GDP — lower than advanced economies — the cost adds tens of trillions of won to the national debt every year.

Some experts caution that the actual size of deficit-financed debt may be larger than government figures suggest. Much of the 359.8 trillion won in debt classified as “financial” may lack truly reliable asset-backing, according to a 2024 review report by the National Assembly's Strategy and Finance Committee.

For example, the inclusion of 97.5 trillion won in housing subscription savings as a repayment source for national housing bonds was flagged as overly optimistic. Similarly, the use of foreign exchange reserves to back 200.3 trillion won in foreign exchange stabilization fund bonds has been criticized as inappropriate.

“The deposits in housing subscription savings accounts are funds that must eventually be returned to depositors, and foreign reserves are needed to defend the currency, not repay debt,” said Choi Byung-kwon, chief specialist at the Assembly’s committee. “Such classifications distort the picture of Korea’s debt and can mislead the public.”

Curbing household debt This photo, taken Oct. 3, 2021, shows signs about a bank's loan programs that were put up on the exterior of a lender in Seoul. South Korea's financial regulator is reviewing further tightening rules on household loans in a bid to curb the fast growth of household debt. (Yonhap)/2021-10-03 13:58:10/ 〈Copyright ⓒ 1980-2021 YONHAPNEWS AGENCY. All rights reserved.〉

The fundamental problem is that revenues are stagnant while expenditures continue to grow. Basic pension spending will inevitably rise due to rapid aging, while new cash benefit programs — once introduced — are politically difficult to roll back.

Among the new measures included in the 2026 budget are subsidies such as providing 40,000 won per month to 54,000 small- and mid-sized company employees in regions with shrinking populations.

Mandatory spending is also set to rise further. Child allowances were expanded from covering up to age 7 to age 8 this year and are scheduled to reach age 11 by 2029 under government plans. Additionally, policies such as extending unemployment benefits to voluntarily resigned young workers will increase the burden.

“Unless there is a sharp increase in tax rates, a significant jump in economic growth or fundamental reform of mandatory spending, deficit-financed debt will inevitably snowball,” said Ahn Dong-hyun, an economics professor at Seoul National University.

This article was originally written in Korean and translated by a bilingual reporter with the help of generative AI tools. It was then edited by a native English-speaking editor. All AI-assisted translations are reviewed and refined by our newsroom.
BY KIM YEON-JOO, JANG WON-SEOK [[email protected]]