20 Trillion Won Extra Budget: Economic Stimulus Card or National Debt Risk? [Issue Analysis]

Government to Cover Supplementary Budget with Deficit Bonds
Concerns Over National Debt Surpassing 1,300 Trillion Won
Expectations for Increased Tax Revenue Through Economic Recovery

As the government signals the formation of a second supplementary budget (extra budget) worth 20 trillion won, expectations for economic stimulus and concerns over fiscal soundness are arising simultaneously. On one hand, government fiscal spending is expected to serve as a priming pump to help recover from shrinking consumption and a sluggish domestic economy. On the other hand, there are claims that, in the long term, an increase in national debt could negatively affect the country's external credit ratings.

On June 11, Lim Kigeun, the newly appointed Second Vice Minister of Economy and Finance, expressed a proactive stance on fiscal policy, stating, "The supplementary budget will be composed of projects that can achieve both economic revitalization and stabilization of people's livelihoods." Following the passage of the first supplementary budget of 13.8 trillion won by the National Assembly last month, the Lee Jaemyung administration plans to inject more than 21 trillion won into the market through this second supplementary budget. While this is aimed at supporting economic recovery, it is estimated that the scale of deficit-financing government bonds to be issued for this purpose will be considerable.

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To secure funding for a supplementary budget, the government typically considers three main options. Specifically, it may utilize unused funds from existing budgets (so-called carryover funds), or it may conduct budget restructuring by reallocating funds originally earmarked for other areas. If neither of these options is feasible, the government generally issues government bonds to secure the necessary funds. Ultimately, the issuance of government bonds is reflected in the national debt. If, as expected, the second supplementary budget is finalized, there are projections that the national debt will exceed 1,300 trillion won for the first time in history, and the national debt-to-GDP ratio will reach between 49.2% and 49.7%.

National debt refers to the liabilities borne by the government. It is a key indicator for assessing a country's fiscal soundness, and a rapid increase in debt can raise concerns about the government's ability to repay its obligations. An increase in national debt inevitably has a negative impact on external credit ratings in the long term. External credit ratings are indicators used by international credit rating agencies and foreign investors to assess the fiscal soundness of each country. If the government fails to demonstrate the effectiveness of its fiscal spending in the market through the two rounds of supplementary budgets, there is a risk of falling into a vicious cycle: deterioration of government fiscal soundness, decline in external credit ratings, decrease in foreign investors, outflow of foreign capital, and ultimately, hindrance to long-term growth.

Recently, there have also been analyses suggesting that expansionary fiscal policy is not a "magic key" for economic recovery. Last month, the Bank of Korea's Economic Research Institute cited a "fiscal stagnation" report by the International Center for Economic Research in Spain, pointing out that excessive public debt by the government can, in the long term, hinder economic growth.

However, an increase in national debt does not necessarily have to be viewed solely as a negative factor. If the supplementary budget succeeds in revitalizing the economy, tax revenues will naturally increase, and the long-term national debt-to-GDP ratio could also stabilize. Global investment bank Morgan Stanley projected at the beginning of this year that if a supplementary budget of 20 trillion won is implemented, South Korea's economic growth rate, initially forecast at 1.5%, could rise by 0.2 percentage points. Joo Won, head of economic research at Hyundai Research Institute, predicted, "If the government implements a second supplementary budget, both the economic growth rate and GDP will increase, so the national debt-to-GDP ratio will not rise significantly."

Some argue that the real issue is not the size of the supplementary budget or the increase in debt itself, but rather the actual impact of the supplementary budget on the economy and the transparency of fiscal execution. If fiscal policy delivers a real economic stimulus effect, it may not negatively affect credit ratings, and could even improve them. The government stated that the Ministry of Economy and Finance is closely reviewing the second supplementary budget and the expected economic growth rate. An official from the Fiscal Policy Bureau of the Ministry of Economy and Finance explained, "We will also announce the expected national debt-to-GDP ratio when the supplementary budget is formulated."