National Debt in Red? Let's Read the IMF Report Properly[Insight] The Exaggerated Debate on Debate: What's Missing Is the Discussion on Tax Increases

Dr. Kangkook Lee is Professor of College of Economics at Ritsumeikan University in Japan and Affiliated Research Fellow at CUKPE

When the International Monetary Fund (IMF) released its Fiscal Monitor report on April 16, South Korea's conservative media unanimously poured out reports warning of national debt. One media headline read, “IMF warns Korea… Government debt to exceed 60% in 3 years.” South Korea was classified as a country with a significantly rising debt ratio, and concerns were expressed that starting next year, the ratio would exceed the average of 11 advanced non-key currency nations. The logic was that, as a non-key currency country, the debt ratio must be strictly managed. Meanwhile, the government had already drawn up a supplementary budget of 26.2 trillion won to support relief from high oil prices and stabilize people's livelihoods. Such reports expressing concern over the rise in the government debt ratio sound like an attempt to curb expansionary fiscal policies that could increase the fiscal deficit. Did the IMF report truly issue a warning to South Korea?

A close reading of the report reveals that media coverage has been significantly exaggerated. The main content of the report is an assessment of the fiscal situations of countries under pressure due to the US-Iran war. South Korea is mentioned briefly in the section evaluating the finances of the group of advanced nations excluding the US. The IMF points out that while countries like the UK and Japan have seen their finances improve since the COVID-19 pandemic, countries with robust fiscal conditions, such as South Korea and the Netherlands, have used their fiscal capacity to slightly offset the group's improvements. Furthermore, it forecasts that government debt ratios will decline in Spain and Japan, while they will rise significantly in South Korea and Belgium. However, since it also notes that Germany's national debt ratio is expected to rise, it is difficult to interpret the report as expressing particular concern over the increase in South Korea's debt ratio.

The South Korean government's fiscal situation is relatively very sound compared to other developed nations. South Korea's general government debt-to-GDP ratio is projected to rise from 54.4% in 2026 to 63.1% in 2031. However, the average for developed nations is 108.2% in 2026 and 114.8% in 2031, nearly double that of South Korea. The same applies to the fiscal balance. While the average fiscal deficit for developed nations is expected to reach 4.8% of GDP in 2026 and 4.5% in 2031, South Korea's figure is lower at 1.5% and is projected to be a deficit of 1.1% in 2031. This is about half the level of other developed nations, excluding the United States. Of course, while non-key currency countries have relatively low debt ratios, it is difficult to argue that the specific currency used has a significant impact on the potential for financial market instability or the appropriate level of the debt ratio.

The net debt ratio (government debt minus assets) is also a figure worth noting. The figure below shows the Korean government's net debt ratio compared to other major developed nations; projected to be approximately 10% of GDP in 2026, it is significantly lower than the developed nations' average of 80%. This is because the Korean government possesses very large assets compared to other countries. Furthermore, financial liabilities with corresponding assets, such as the Foreign Exchange Stabilization Fund, account for about 27% of Korea's total national debt. When government assets are taken into account as well, the reasons to worry about the Korean government's debt are further reduced.

There are several countries with large government assets; while Singapore's total debt ratio is high at about 170%, it has no net debt due to large assets such as sovereign wealth funds, and Norway's net debt ratio is also significantly negative. Recently, Japan's Takaichi government has been pushing for fiscal expansion, arguing that although the government's total debt ratio is high enough to exceed 200% of GDP, its net debt ratio is not high internationally. 

The IMF’s official assessment is “sufficient fiscal capacity”

How the IMF assesses Korea's fiscal situation is found in the Annual Consultation (Article IV) report released in November 2025. The report stated, “Korea’s government debt remains at a sustainable level, and significant fiscal capacity exists (p. 9).” It also assessed that fiscal policy in 2025 was appropriate, the 2026 budget is consistent with IMF recommendations, and productive public investment would help stimulate growth. This report (Annex V) stated that Korea’s government debt poses a low risk, considering the stable primary fiscal balance, economic growth, and low debt ratio .

The report also points out that structural fiscal reforms will be necessary to meet the need for sustainable long-term spending (p. 11) . It suggests that in the long term, low birth rates and rapid population aging will increase the burden of fiscal spending, posing a high risk to debt levels and fiscal sustainability. The Korean government is clearly aware of this. The Ministry of Economy and Finance projects that due to demographic changes, mandatory expenditures such as pensions and health insurance will surge, and as growth slows, the fiscal deficit will widen, causing the national debt ratio to rise to 156% of GDP by 2065. This is because the proportion of the population aged 65 and older will increase from approximately 20% in 2025 to approximately 47% in 2065, making the country older than Japan, while the working-age population will shrink by nearly half.

President Lee Jae-myung is giving a presentation at the National Briefing on Economic Growth Strategy held at Che 청wadae last January. ©Cheongwadae

However, it must not be forgotten that since the debt ratio is calculated by dividing government debt by GDP, it changes significantly over the long term due to economic growth and demographic shifts. If growth can be fostered through public investment—such as R&D and industrial policy—and fiscal expansion aimed at improving the lives of young people and increasing the birth rate, the debt ratio will decline and fiscal sustainability will be strengthened. Research by the renowned macroeconomist Professor Blanchard has demonstrated that comparing the nominal economic growth rate with government bond yields is key to changes in the government debt ratio. This suggests that as long as the primary fiscal deficit is not large, the national debt ratio can stabilize if the growth rate is higher than the interest rate. 

Ultimately, what matters is the effort toward productive and effective fiscal spending that enhances growth potential and protects vulnerable groups. If fiscal spending can generate higher returns by stimulating growth than the interest costs incurred by financing through government bonds, then actively expanding fiscal spending would be the core of fiscal management. In fact, the pace of increase in Korea's debt ratio in this fiscal monitor report slowed slightly compared to the forecast in last October's report, which was due to an upward revision of Korea's growth outlook. Professor Summers of Harvard University points out that the interest cost on government bonds relative to GDP is a more appropriate indicator of fiscal conditions than the government debt ratio itself. Korea's interest cost on government bonds is projected to reach approximately 30 trillion won in 2026, or about 1.1% of GDP, which is also a low level internationally.

In retrospect, a key lesson macroeconomics learned since the global financial crisis was that austerity is detrimental to the economy. The IMF also reflected that the austerity policies prescribed during the 2010 Southern European debt crisis worsened both the economy and public finances, and shifted its stance to support fiscal expansion during recessions. In particular, recent macroeconomic studies emphasize that recessions generate a "hysteresis effect"—a phenomenon where conditions become entrenched rather than recovering after an external shock—through factors such as slowed adoption of new technologies and prolonged unemployment, thereby negatively impacting productivity growth and economic development in the long term. Consequently, the Keynesian teaching that governments should actively spend to heal the scars of a recession has become common sense. This was the background behind countries implementing expansionary fiscal policies in response to the 2020 pandemic, even at the cost of large fiscal deficits. These discussions emphasize the necessity of active expansionary fiscal policies to prevent recessions and expand growth potential.

Doubts about long-term fiscal preparedness… Discussion on tax increases needed

What is interesting is that the Blue House reacted immediately to this report. Kim Yong-beom, Chief of the Policy Office, wrote on Facebook, “While the Korean government’s debt ratio is low internationally and stable in the short term, concerns about the future exist, and a real debate is needed regarding growth potential and the future of public finance, not just the debt ratio.” Ryu Deok-hyun, Senior Secretary for Fiscal Planning, countered, “Korea’s fiscal fundamentals and policy discipline are solid, and international organizations tend to underestimate the sustainability of Korean finance.” The argument is that the recent increase in foreign investment in Korean government bonds following its inclusion in the World Government Bond Index demonstrates global investors’ optimism regarding the Korean economy and public finances. This is a swift response compared to the Moon Jae-in administration, which committed the misstep of implementing contractionary fiscal management resulting from massive tax surpluses in 2018. It appears to be an effort to overcome conservative arguments opposing fiscal expansion by exaggerating the national debt issue, based on close communication with the public.

Kim Yong-beom, Chief of the Presidential Policy Office, stated that the debate on national debt should focus on growth potential and the future of public finance. © Screenshot from Kim Yong-beom's Facebook

Nevertheless, doubts remain as to whether current efforts to address long-term fiscal risks are sufficient in the face of the impending demographic shock. Parametric reform of the National Pension was implemented last March, and the government recently presented targets for spending cuts. However, the issue of tax increases is missing from current fiscal discussions. In fact, conservatives concerned about the rise in national debt emphasize only austerity, failing to discuss raising taxes. This is despite the fact that Korea still requires a larger and more competent government, as its tax revenue and government spending as a percentage of GDP remain relatively low compared to other developed nations.

Regarding tax increases, there is considerable room for disappointment with the current administration. This is because, for the sake of sustainable fiscal management, the focus is primarily on boosting growth rates and restructuring expenditures. While the Lee Jae-myung administration reversed the tax cuts of the Yoon Suk-yeol administration through the 2025 tax reform centered on raising corporate taxes, it did not touch the income tax and comprehensive real estate tax, which had seen significant reductions; consequently, it is projected that only about half of the previous administration's tax cut effects will be recovered. For instance, while capital gains from the stock market are not currently being taxed, the introduction of a financial investment income tax continues to be delayed. Above all, due to various deductions, the effective tax rate on earned income in Korea is at a very low level internationally, except for the highest income brackets. 

It is not an easy task when considering political support and votes. However, shouldn't someone in a position of responsibility bring up the topic of tax increases for sustainable and equitable finances? For the future of Korean finance, we must not avoid discussing tax hikes; instead, a productive debate encompassing both taxes and government spending is necessary.

(This article was originally published as a column in Social Korea in Korean and translated into English with the help of Google Translate. The views expressed in this article are those of the author(s) and do not represent the official stance of the center.)