[Gangnam Perspective] Hopes for the Lee Jae-myung administration in the ‘first year of a great leap in public finance’

The Republic of Korea (South Korea) economy is a mix of good and bad. Starting with the good news, the record-breaking Korea Composite Stock Price Index (KOSPI) level (closing at 4,624.79 on the 12th) is something that could be touted as an achievement of the Lee Jae-myung administration. As people mutter, “Huh, maybe KOSPI 5,000 is possible,” the administration is trying to get in sync with policies that respond to that sense of expectation.
Exports are also strong. It may not be purely the result of government policy, but the saying that luck is part of competence seems to apply. Artificial Intelligence (AI) transformation and semiconductors have entered a supercycle, and this would not have been possible without prior preparation.
On the other hand, the US Dollar–South Korean Won exchange rate is a headache. The foreign exchange authorities rolled out three or four short-term measures at the end of last year as part of a “exchange rate stabilization series,” including restructuring National Pension Service (NPS) investments and tax incentives to bring dollars back onshore. In the end, they even dumped a large amount of dollars on the market late last year to drag the rate down to the 1,420-won range. But alas, the rate has bounced back to the 1,468-won level (closing at 1,468.4 won per US Dollar–South Korean Won exchange rate on the 12th). The administration’s expectations have been thoroughly disappointed. As soon as the new year began, retail investors quickly converted the slightly stronger won into dollars and rushed into the U.S. stock market. Korean individual investors investing in overseas stocks, who hold more than 160 billion dollars in balances, made net purchases of U.S. stocks approaching a record 2 billion dollars in less than ten days (from the 1st to the 9th of this month). Who can blame them for betting on the U.S. economy, which is sucking in global capital and cutting-edge technology and expanding through protectionism at home? At this pace, the exchange rate seems likely to surpass last year’s high of 1,487.6 won.
When the value of the won plunges, the effectiveness of the fiscal injections poured out by the administration also diminishes. Because of high-exchange-rate-driven inflation, households see their real income shrink, companies see their earnings squeezed, and the state sees its tax revenues dwindle—across the board.
The Lee Jae-myung administration plans to inject roughly over 1,000 trillion won in fiscal spending this year to achieve a growth rate of 2.0%. It is no exaggeration to call this the “first year of a great leap in public finance.” Yet even with all this, we are talking about “just 2% growth,” which is disheartening. Worse still, if you strip out the contribution from semiconductor exports (0.4 percentage points), this year’s growth rate is projected to remain in the 1% range (assuming the Bank of Korea (BOK) forecast of 1.8%). It has been a distortion and an optical illusion. That is not all. The employment statistics, which are expected to hit a record high this year (employment rate of 63%), are also largely the result of publicly funded jobs for the elderly created through fiscal spending.
Our economy is said to be experiencing a deepening form of so-called “K-shaped growth,” in which structural imbalances widen the gap between the two extremes. Given that the use of “K (Republic of Korea)” has generally carried positive connotations, this feels somewhat jarring. Yet it seems clear that a kind of fiscal polarization resembling the gaping “crocodile’s mouth”—with falling state revenues and rising expenditures—is occurring even in a so-called “growth” phase.
I fully agree that our limited public finances should be invested in future industries to build national wealth. But if you look closely, you can see Lee Jae-myung–style cash handout policies quietly embedded within. Newly introduced or expanded welfare expenditures such as the Rural Basic Income (234.1 billion won for pilot projects in 10 counties) and the expansion of the Child Allowance (up to 130,000 won per month) fall into this category. Such cash-based welfare is highly addictive; once people get a taste, it is hard to roll back. The sweet taste of last year’s 13 trillion won worth of Consumption Coupon (Livelihood Recovery Subsidy) has already faded from memory after just a few months. On top of this, there is the Basic Pension, which distributes 23 trillion won to 70% of seniors; the four major public pension schemes—NPS, Public Officials Pension, Teachers' Pension, and others—whose spending is growing by more than 8% annually and is expected to approach 100 trillion won this year; and the National Health Insurance, which has fallen into deficit. All of these are mandatory expenditures.
At times it feels like an unavoidable trend in a super-aged South Korea, yet one cannot help but question whether the current working generation, politicians, and policymakers have truly done enough. The longer reforms are delayed, the higher the costs that current and future generations will have to bear. In its second year, the Lee administration should make this year not the “first year of a great leap in the economy,” but the “first year of reform.” It must move to dismantle anti-market regulations, restructure industries, and tackle the reform of the four major public pension schemes and the Four Major Social Insurance Programs. Otherwise, in 2031, the next administration’s president will likely inherit 2,000 trillion won in national debt and once again proclaim a “first year of a great leap in the economy.”
skjung@fnnews.com Reporter