With the inauguration of the new government, discussions on drafting a supplementary budget are expected to heat up. Lee Jae-myung, the president, stated at the final campaign rally for presidential candidates on the 2nd at Yeouido Park in Seoul, “If the Democratic Party of Korea comes to power, we will ensure that you can truly feel how the economy revives and livelihoods improve through the supplementary budget and the normalization of the stock market.”
Externally, the deterioration of the U.S.-led trade environment, and internally, the stagnation of domestic consumption are the conditions under which Lee Jae-myung's economics aims to revive the economy through fiscal expansion.
During the presidential campaign, the president mentioned plans to draft a supplementary budget of over 30 trillion won if elected. Although the final scale may be adjusted considering the country's fiscal situation, many within the Democratic Party of Korea generally believe the supplementary budget will be around this size.
Earlier this year, the Democratic Party of Korea demanded an expansion of the fiscal role amid an economic slowdown and announced a supplementary budget plan amounting to 35 trillion won. Subsequently, the government and the National Assembly agreed to pass the first supplementary budget of 2025, amounting to 13.8 trillion won.
If we subtract from the supplementary budget scale proposed by the Democratic Party of Korea earlier this year, more than 21 trillion won remains. On the 12th of last month, Jin Sung-joon, the policy chairman of the Democratic Party of Korea, noted at a press conference for the top 10 policy pledges at the National Assembly, “With the passed supplementary budget of about 13 trillion won, it is insufficient to defend the economy even minimally,” and added, “We believe an additional 20 trillion won is necessary.”
However, the Democratic Party of Korea recently stated that the supplementary budget passed by the National Assembly last month reflects the special case of 'wildfire response'; therefore, a new supplementary budget of over 30 trillion won should be pursued for livelihood and economic recovery.
The core project of the supplementary budget is expected to be regional love gift certificates (local currency). This core project of Lee Jae-myung's economics, 'local currency,' also sparked the 'hotel economics' controversy during the presidential campaign. His theory is that temporarily injecting funds into regions with low economic vitality will activate the local economy as the funds circulate.
During the first supplementary budget drafting process, the government and the National Assembly allocated 400 billion won for the local currency budget, but the president considers this insufficient. The initially allocated local currency budget was formed to support part of the issuance expenses of local governments.
If the 'national support fund' proposed by the president to stimulate domestic demand results in providing 200,000 to 250,000 won per person, it alone would require 10 trillion to 12.5 trillion won.
Items proposed in the supplementary budget earlier this year by the Democratic Party of Korea include 2.6 trillion won for local government financial reinforcement, 1.2 trillion won for high school free education (900 billion won) and free care for 5-year-olds (300 billion won), 1 trillion won for expanding electric vehicle support and responding to the climate crisis, and 800 billion won for expanding power grids and supporting renewable energy, including RE100 responses. Tourism, culture, and agricultural and marine product consumption vouchers, as well as support budgets for small businesses aimed at boosting consumption, are also anticipated to be included in the second supplementary budget.
The issue is funding. Since most of the supplementary budget needs to be covered by issuing deficit-financing government bonds, the deterioration of national fiscal soundness is unavoidable. As of last month, government debt stood at 1,280.8 trillion won, accounting for 48.4% of the gross domestic product (GDP).
However, the president believes that Korea's current fiscal situation is fine. During the presidential campaign, he argued, “There are ignorant people who say the country should not have debts, citing that national debt has increased to 1,000 trillion won,” adding, “Our country’s government debt is below 50%. In other countries, it's over 110%.”
Recently, even the United States, a country with a reserve currency, has seen its national credit rating decline due to a surge in government debt, falling into a 'trap of fiscal deterioration.' In this context, there are concerns that Korea, a non-reserve currency country, should not ignore signals of a fiscal soundness crisis.
Francesco Bianchi, a professor at Johns Hopkins University, warned at the 'BOK International Conference' held in Seoul on the 2nd that the increase in government expenditure could raise inflationary pressures, harming the entire nation, and that the government could go bankrupt if it cannot sustain the spending increase.
An economics professor requesting anonymity pointed out, “Government debt should not be assessed solely by numbers; factors such as whether the country is a reserve currency and the rate of aging should be considered in determining the level,” and added, “What should be looked at importantly is the rate of debt increase and aging.”