The Sweet Trap of Fiscal Spending: Fundamentals Are the Real Solution

National debt growing 1.7 times faster than economic growth / Fiscal spending has become habitual... when the government spends, the private sector’s share shrinks / We must leave the next generation not debt, but a healthy economic foundation

Whenever the economy runs into trouble, a familiar formula appears in our society. The government is expected to loosen the purse strings, expand public investment, and help the country weather the crisis. In the short term, it can seem effective.

But the more this formula is repeated, the more we are forced to confront an uncomfortable truth: money spent by the government ultimately becomes debt that the public must repay. Economic strength, in other words fundamentals, is not built through short-term stimulus financed by the budget. The economy gains real strength only when the private sector is free to run.

That is why the IMF, in its recently published Fiscal Monitor, issued a pointed warning about Korea. While most advanced economies are stabilizing or reducing their debt ratios, Korea is heading in the opposite direction.

Before COVID-19, Korea’s debt-to-GDP ratio was below 40 percent. It has now exceeded 54 percent and is projected to reach 63 percent by 2031. Debt is growing 1.7 times faster than the economy.

Fiscal soundness carries particular importance for a country like Korea, which does not issue a reserve currency. The United States can repay its debt in dollars. Korea cannot. The recent Middle East war made this clear, as the dollar-won exchange rate surged past 1,500 won, sharply shaking the Korean won. If an external shock hits when fiscal capacity is already weak, the Korean economy suffers a double blow.

Of course, there are times when the government must step in during a crisis. The problem is that once spending rises, it rarely falls back even after the crisis has passed. Those receiving the benefits naturally want them maintained, and any attempt to cut them back triggers resistance. In that way, emergency response becomes routine, and pump-priming turns into inertia.

Looking back, sustainable growth has always begun in the private sector. Money spent by the government, whether from taxes or government bonds, ultimately comes from the private sector. The more the government spends, the less businesses and households can spend. It is less about making the pie bigger than about dividing up the existing pie.

So what is the solution? The key is to shift the driver of growth back from the government to the private sector. A true stimulus policy is one that creates an environment where companies can invest in new technologies, entrepreneurs can take bold risks, and consumers can choose freely. The government should focus on reducing regulations, increasing market autonomy, and cultivating the conditions in which private creativity can flourish.

We already know the answer. Industries such as semiconductors, batteries, and K-content that have become globally competitive were not created according to government design. They are the result of companies recognizing market opportunities first, taking risks, and investing. The government’s role is not to stand in front and decide the direction, but to open the way from behind so that such challenges are possible.

In the end, what matters is fundamentals. Growth built on government debt loses its effect and sinks back down, but an economy strengthened by private-sector vitality can withstand any crisis. Removing regulations, allowing businesses to invest freely, and creating a system in which the market can find answers on its own—this is the path to truly strengthening the fundamentals of the Korean economy.

Government debt is, in the end, a burden that the next generation must bear. This does not change under any government or in any era. What we should pass on to the next generation is not a mountain of debt, but a healthy economic foundation capable of sustaining growth on its own. An economy alive with private-sector vitality—that is the best legacy.

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Original title: 재정 투입의 달콤한 함정, 펀더멘털이 진짜 해법이다

Author: Sang-yeop Kim

Date: 2026-04-23

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=28829