The public sector deficit, encompassing the central and local governments as well as public corporations, surpassed 83 trillion won last year to record an all-time high.

This resulted from a sharp increase in private transfers, driven by the implementation of two supplementary budgets aimed at stabilizing people's livelihoods, alongside rising government consumption fueled by increased health insurance benefit expenditures.

However, forecasts indicate that the deficit margin could narrow this year and potentially shift to a surplus next year, bolstered by the semiconductor boom.

According to the 2025 Public Sector Accounts (Provisional) released by the Bank of Korea today (the 18th), the public sector balance (total revenue minus total expenditure) recorded a deficit of 83.1 trillion won.

This marks the largest deficit since the compilation of related statistics began in 2007.

In these statistics, the public sector is defined as the general government (central government plus local government plus social security funds) combined with public corporations (non-financial and financial public corporations).

Specifically, total public sector revenue rose 4.7% compared to 2024, reaching 1,192.1 trillion won.

Although interest income declined due to lower market interest rates following two base rate cuts last year, the increase was driven by rising tax revenues and social contributions.

Total public sector expenditures increased by 5.5% from 2024 to reach 1,275.2 trillion won.

The growth was centered around other current transfers, which are private transfers, and final consumption expenditures, representing government consumption.

Lee Hyun-young, head of the Expenditure National Income Team at the BOK, explained, "Last year, as we formulated two supplementary budgets for livelihood stability—including 13.5 trillion won worth of livelihood recovery consumer coupons—transfers to the private sector surged." She added, "Government consumption also increased due to the active fiscal execution stance adopted since the inauguration of the new administration, preparations for hosting the APEC Summit, and rising health insurance benefit expenditures following the normalization of medical services."

Because the increase in total expenditures outpaced the increase in total revenue, the deficit expanded from 69.1 trillion won to 83.1 trillion won over the span of a year.

The public sector balance recorded surpluses for six consecutive years from 2014 to 2019, but has posted deficits for six straight years starting in 2020, when COVID-19 began.

Deficits persisted from 2020 to 2022 due to pandemic-related spending and energy price hikes stemming from the war in Ukraine, while declines in corporate tax revenue caused by sluggish corporate performance served as the primary factor behind deficits in 2023 and 2024.

Team leader Lee explained, "For 2025, the government's private transfer expenditures and public corporations' housing-related investments are the main factors behind the deficit."

Broken down by sector, the central government balance recorded a deficit of 90.1 trillion won last year, expanding its deficit size compared to 2024.

The deficit size is the largest since the compilation of statistics began.

Although tax revenue increased, private transfer expenditures for livelihood stability grew, expanding the deficit margin.

The local government deficit narrowed from 15.5 trillion won in 2024 to 2 trillion won last year.

Analysts attribute the smaller deficit to a significant increase in local allocation grants transferred from the central government.

The social security fund saw its surplus shrink from 41.8 trillion won to 32 trillion won.

This is the result of social benefits paid by the government to citizens increasing at a steeper pace than social contributions paid by citizens amid an aging population.

Consequently, the general government balance—comprising the central and local governments and social security funds—totaled a deficit of 60.1 trillion won by subtracting total expenditures from total revenue last year.

The deficit size expanded compared to 2024, marking the largest scale since statistics began.

The BOK explained that the ratio of the general government balance to nominal GDP last year stood at -2.2%, a favorable level compared to the OECD member country average of -4.4%.

The ratio of the public sector balance to nominal GDP stood at -3.1%, which is higher than those of the UK, Japan, and Australia (-5.7%), but lower than those of Switzerland and Denmark (+0.5%).

Total revenue and total expenditure for non-financial public corporations, such as Korea Electric Power Corporation and Korea Land and Housing Corporation, stood at 231.9 trillion won and 254.1 trillion won respectively last year, increasing by 0.5% and 2.7% over a year.

Accordingly, the non-financial public corporation balance recorded a deficit of 22.1 trillion won, expanding the deficit scale compared to the previous year.

The expansion of the non-financial public corporation deficit was influenced by a sharp surge in investments by housing-related public corporations, including public housing construction and the acquisition of rental housing.

Total revenue (66.3 trillion won) and total expenditure (67.1 trillion won) for financial public corporations, such as the Korea Development Bank and Korea Housing Finance Corporation, decreased by 4.8% and increased by 4.1% respectively.

Consequently, the financial public corporation balance shifted from a surplus of 5.1 trillion won in 2024 to a deficit of 900 billion won last year.

While property income payments decreased due to increased interest income, current transfer expenditures—the amounts paid by financial public corporations to the state—surged significantly.

Regarding the public sector balance for this year, Team leader Lee stated, "Starting this year, corporate tax and income tax revenues are projected to increase substantially driven by the semiconductor boom. Consequently, we expect the deficit margin to narrow in 2026 centered around the general government, with a possibility of transitioning to a surplus in 2027."

She also added, "The upward adjustment of contribution rates for the National Pension and health insurance is expected to dampen the pace of shrinking surpluses in social security funds, which will have a positive effect on improving the balance."

(Photo courtesy of Bank of Korea, Yonhap News)