[Sejong = E-Daily Reporter Ha Sang-yeul ] An analysis shows that South Korea’s government debt-to-GDP ratio fell to 42.6% in the second quarter of this year, down 2.2 percentage points from the previous quarter.

◇“Debt Ratio Will Skyrocket Once the Optical Illusion Fades”

According to the Institute of International Finance (IIF)’s “Global Debt Monitor” report obtained by E-Daily on the 6th, South Korea’s government debt-to-GDP ratio stood at 42.6% as of the second quarter of this year, down 2.2 percentage points from the previous quarter (44.8%). Although concerns over fiscal soundness grew last year as the government debt-to-GDP ratio approached the 50% mark in the fourth quarter (48.6%), the situation appears to be stabilizing.

South Korea’s government debt-to-GDP ratio remains significantly lower than that of major developed nations. It ranks 11th among the 12 developed countries tracked by the IIF. Japan (203.4%), the United States (119.0%), France (111.4%), and the United Kingdom (81.4%) all had ratios significantly higher than South Korea’s.

Looking at the debt-to-GDP ratio in isolation, it appears that fiscal health has improved noticeably. However, the IIF assesses that this improvement in indicators aligns with the “inflation-induced debt illusion” recently observed globally. The IIF warned, “This reflects an ‘illusion of stability,’ in which high inflation drives up nominal growth, thereby suppressing the rise in the debt-to-GDP ratio,” adding, “This apparent stability masks the sharp increase in the actual interest repayment burden borne by the government and the private sector.”

Domestic fiscal experts also highlighted the dangers of this illusion. Kim Woo-cheol, President of the Korean Association of Public Finance (Professor of Taxation at the University of Seoul), diagnosed the situation as “a pure ‘denominator effect’ resulting from nominal GDP surging by nearly 20 percent—an unprecedented rise,” adding, “Most of this growth, excluding the real growth rate, stems from the GDP deflator (price effects), such as rising unit prices for semiconductor exports.”

In particular, Professor Kim criticized the government for failing to seize the opportunity to strengthen fiscal health. He pointed out, “When excess tax revenue comes in, setting it aside under the guise of a ‘Future Response Fund’ instead of using it to repay government bonds is in direct violation of the National Finance Act,” adding, “Refusing to deleverage while targeting a 12.8% increase in spending next year—which will result in a deficit in the 100 trillion won range—is a highly aggressive act of increasing debt.” He added, “If the illusion created by falling semiconductor prices fades in the future, the debt ratio will skyrocket uncontrollably due to an expenditure structure that has already become entrenched by excessive spending.”

These concerns are confirmed by the numbers. According to the “2026–2030 National Fiscal Management Plan,” even though the plan is based on an average annual increase of 11.8% in national tax revenue, the national debt is projected to rise from 1,412.8 trillion won this year (based on the supplementary budget) to 1,734.1 trillion won by 2030. The managed fiscal balance deficit is also projected to widen to 100.8 trillion won (-2.9% of GDP). This is why experts are warning that if the “semiconductor illusion” fades and tax revenue projections decline, the debt-to-GDP ratio will skyrocket out of control.

◇ Household debt ratio also declines… but interest burden increases

This illusion of a declining ratio is also evident in private-sector debt, which underpins the economy.

According to the IIF, South Korea’s household debt-to-GDP ratio in the second quarter stood at 85.0%, down 2.8 percentage points from the previous quarter (87.8%), while the debt ratio for non-financial corporations also fell by 2.2 percentage points, from 110.8% to 108.6%.

While the indicators suggest a downward stabilization trend, the debt burden felt by the real economy has reached its peak. According to the Bank of Korea, the outstanding balance of household credit surpassed 2,000 trillion won for the first time in history in the second quarter. With mortgage loans surging due to strong housing purchase sentiment in the Seoul metropolitan area, compounded by rising loan interest rates, the actual interest repayment burden on households is becoming increasingly heavy.

Despite the decline in the ratio, the Bank of Korea and financial authorities plan to maintain a tight grip on managing the total volume of household debt. Jang Jeong-su, Deputy Governor of the Bank of Korea, recently stated at a September briefing on financial stability, “Even though nominal GDP has grown, the effects on income improvement vary across sectors,” adding, “We must continue to maintain our stance on managing household debt.”

Even within the Bank of Korea’s Monetary Policy Committee, there are voices cautioning against the misleading nature of these indicators. According to the minutes of the August Monetary Policy Committee meeting, one committee member emphasized that the real repayment burden on households is determined by income, not nominal GDP, and stressed the need to manage policy strictly, keeping in mind the disconnect between the decline in indicators and the actual burden felt by households.

Meanwhile, debt statistics from major international organizations such as the Bank for International Settlements (BIS) or the Organization for Economic Cooperation and Development (OECD) typically have a lag of about half a year between the collection of national data and its publication. In contrast, reports from the Institute of International Finance (IIF)—an alliance of major global financial institutions—are considered leading indicators that provide the fastest insight into the latest global trends by rapidly compiling data on global debt flows.