20.2 Trillion Won Spent to Boost Economy... Concerns Raised That Deficit-Financed Supplementary Budget May Only Increase Burden on Ordinary Citizens [New Government Extra Budget]

30.5 Trillion Won Supplementary Budget Approved by Cabinet
10.3 Trillion Won Allocated for Revenue Adjustment
20.2 Trillion Won to Be Spent on Universal Cost-of-Living Support
19.8 Trillion Won to Be Covered by Issuing Deficit-Financing Bonds

The new government has drawn up a supplementary budget (extra budget) totaling 30.5 trillion won just fifteen days after taking office. Of this, 10.3 trillion won is allocated to cover tax revenue shortfalls caused by the economic downturn, meaning the net increase in government spending is 20.2 trillion won. Including the first round of supplementary budgets, the total extra budget for this year amounts to 34 trillion won. To fund this supplementary budget, which centers on providing universal cost-of-living support payments to all citizens, the government plans to issue nearly 20 trillion won in deficit-financing bonds, pushing the national fiscal deficit above 110 trillion won. While the government explains that a "short-term shot" is unavoidable to revive the rapidly declining economy, concerns have been raised that issuing deficit-financing bonds could drive up government bond yields, which in turn could raise market interest rates and increase the interest burden on ordinary citizens.

On June 19, the government, presided over by President Lee Jaemyung, held a Cabinet meeting to approve this supplementary budget plan, with the intention to submit it to the National Assembly on June 23. This supplementary budget, promoted under the banners of "economic stimulus" and "stabilizing livelihoods," is focused on reviving the rapidly declining economy. South Korea's economic growth rate plunged to -0.2% in the first quarter, and the economy has experienced near-zero growth for four consecutive quarters, deepening the economic slump. Im Gi Geun, the Second Vice Minister of Strategy and Finance, stated, "The new government has prepared the supplementary budget at an unprecedented speed to respond immediately to the difficulties faced by the public and small business owners."

Im Gi Geun, Vice Minister of Strategy and Finance, is announcing the key points at a detailed briefing on the supplementary budget of the new government held at the Central Building of the Government Complex Sejong on the afternoon of the 18th. (Photo by Ministry of Strategy and Finance)

10.3 Trillion Won to Fill Tax Revenue Gap... Third Largest in History

This supplementary budget also includes revenue adjustments to address tax shortfalls caused by last year's and this year's economic downturn. Of the 30.5 trillion won supplementary budget announced by the government, 10.3 trillion won is allocated for this purpose. Following the record-breaking tax revenue shortfalls totaling 87 trillion won over two consecutive years under the Yoon Suk Yeol administration, another 10.3 trillion won shortfall is projected for this year.

The government expects corporate tax revenues to decrease by 4.7 trillion won this year due to last year's economic recession, and value-added tax revenues to fall by 4.3 trillion won due to sluggish private consumption. The extension of the flexible fuel tax rate cut is projected to reduce transportation tax revenue by 2.3 trillion won, but inheritance tax revenue is expected to increase by 900 billion won due to a rise in the number of deaths.

This is the third time in history that the annual revenue adjustment has exceeded 10 trillion won, following April 2009 (11.4 trillion won) during the global financial crisis and July 2020 (11.4 trillion won) during the COVID-19 pandemic.

With this supplementary budget, total revenue for this year's budget will decrease by 10.4 trillion won, from the originally planned 652.8 trillion won to 642.4 trillion won, while total expenditure will increase by 14.9 trillion won, from 687.1 trillion won to 702 trillion won.

The supplementary budget will be funded through 5.3 trillion won in expenditure restructuring, 2.5 trillion won in available fund resources, and 3 trillion won in adjustments to the Foreign Exchange Equalization Fund bonds. The remaining 19.8 trillion won (65%) will be raised through the issuance of deficit-financing government bonds. Although detailed expenditure restructuring plans were not disclosed, the government plans to cut 2 trillion won from education grants and reduce 3.3 trillion won from projects with delayed or unused budgets. Yoo Byungseo, Director of the Budget Office at the Ministry of Strategy and Finance, stated, "We focused on cutting expenditures for social overhead capital (SOC) projects," adding, "We made savings by slightly adjusting budgets for projects where spending within the year is impossible, such as road and rail projects, national scholarships, electric vehicle subsidies, and the Inter-Korean Cooperation Fund."

With the increase in government bond issuance due to this supplementary budget, national debt is expected to rise from the originally planned 1,280.8 trillion won to 1,300.6 trillion won this year. As a result, the national debt-to-GDP ratio will increase by 0.6 percentage points, from 48.4% to 49.0%. The national debt-to-GDP ratio improved from 46.9% in 2023 to 46.1% last year, but is projected to rise again to over 49% this year.

The managed fiscal deficit, which reflects the country's fiscal health, will increase by 24 trillion won from 86.4 trillion won to 110.4 trillion won. The managed fiscal balance is calculated by subtracting total expenditure from total revenue, excluding the four major social security funds such as the National Pension. The managed fiscal deficit has continued every year since the 2008 global financial crisis, and has expanded to around 100 trillion won annually since the 2020 pandemic. The managed fiscal deficit as a percentage of GDP will also widen from 3.3% to 4.2%, an increase of 0.9 percentage points.

Regarding concerns that the issuance of 19.8 trillion won in deficit-financing bonds could drive up bond yields, Vice Minister Im stated, "We believe the demand base in the government bond market remains solid," and added, "Since a supplementary budget of 20 to 30 trillion won has already been anticipated since the beginning of the year, these concerns have likely already been reflected in the market."

Concerns About Adverse Effects of Deficit-Financed Stimulus

The government and the ruling party argue that fiscal spending should be increased to revive the economy, even if it means taking on more debt. While the rapid deterioration of the economy, with this year's growth rate expected to remain in the 0% range, makes a supplementary budget unavoidable, critics argue that the use of the supplementary budget is inappropriate.

Kang Sungjin, Professor of Economics at Korea University, pointed out, "If fiscal expansion leads to economic growth, there is no problem, but the fiscal multiplier of transfer expenditures (such as consumption coupons) is much lower than that of investment." According to the Bank of Korea and the Korea Institute of Public Finance, the fiscal multiplier for government consumption and investment in Korea is estimated at 0.68, while the multiplier for transfer expenditures is only 0.22. This means that if the government spends 100 billion won on building a dam, it boosts GDP by 68 billion won, but if it provides cash support such as grants, the effect is only 22 billion won. Professor Kang added, "Fiscal spending should serve as a catalyst to boost private sector vitality, but if the government tries to solve all economic problems with fiscal measures while leaving structural issues such as outdated market regulations unaddressed, it will only result in inefficient spending."

There are also concerns that artificially boosting consumption through short-term measures may not be a fundamental solution to economic stagnation. Lee Yoonsu, Professor of Economics at Sogang University, noted, "Cash handouts such as universal cost-of-living support payments may provide temporary relief during a crisis, but their effects will not last long," and added, "If supplementary budgets financed by deficit bonds lead to higher government bond yields and market interest rates, this could further dampen the economy in the medium to long term."