South Korea: Government targets 2.9% of GDP managed fiscal deficit in 2025 – Budget proposal

• Expenditures to increase by 3.2%, while revenues set to increase by 6.5%
• Government aims to keep managed fiscal balance below 3% starting from 2025
• Budget for R&D to increase sharply by 11.8% in 2025
• Government debt still projected top increase to 48.3% of GDP

The government targets a managed fiscal deficit of 2.9% of GDP, down from 3.6% of GDP in the 2024 budget, according to the 2025 Budget proposal released by the finance ministry on Tuesday. The managed fiscal balance removes the performance of social security funds and solely measures the performance of the government. The current Yoon government aims to keep the managed fiscal deficit below 3% of GDP starting from 2025 and stabilize government debt at around 50% of GDP by 2028, according to its mid-term fiscal management plan. The consolidated fiscal balance, which also includes the fiscal performance of social security funds, is projected to decline to 1.0% of GDP from 1.8% of GDP in 2024. At the same time, government debt is still projected to grow to 48.3% of GDP from 47.4% of GDP in 2024.

President Yoon promised to tighten belts, reduce fiscal inefficiency and ensure that spending is targeted on necessary areas. The government faces significant fiscal challenges ahead, particularly with respect to the rising cost of health insurance and pensions due to the aging population, he said.

Total expenditures are projected to increase by 3.2% to KRW 677.4tn in 2025 led by increase for the budget for health, welfare and employment (up by 4.8%), the budget for education (up by 3.5%) and the budget for R&D (up by 11.8%). Excluding mandatory spending, discretionary spending is projected to increase by 0.8% in line with the government's fiscal discipline plan. Spending continued to face the biggest pressure in the health and pension budget due to the increasing number of elderly people. The government is still projected to slash non-core expenditures worth KRW 24tn in order to improve fiscal efficiency. The pace of expenditure growth will accelerate somewhat from the 2.8% increase targeted in last year's budget proposal, which was the slowest in almost 20 years.

Total revenues are projected to increase by 6.5% to KRW 651.8tn in 2025 driven by the country's gradual recovery of domestic and economic conditions and strong improvement in corporate profitability in 2025. Thus, a large part of the projected fiscal consolidation in 2025 will come from the rebound in tax revenues, which have struggled significantly over the past 2 years due to weak corporate profitability and weak performance of asset markets.