President Lee Jae-myung instructed officials to first look into "fiscal capacity for a supplementary budget" immediately after taking office. The government has begun practical work on the second supplementary budget, but has already issued treasury bonds at a record level. As of April, the balance of treasury bond issuance exceeded 1,100 trillion won. The new administration faces its first test between a speed race for economic response and fiscal sustainability.
On the 5th, the Ministry of Economy and Finance started practical discussions related to the second supplementary budget, presided over by Yoo Byeong-seo, Deputy Minister for Planning and Coordination, with planning and coordination officers from each ministry. This follows President Lee’s directive to the Ministry of Economy and Finance at the emergency economic task force meeting the day before, emphasizing the need for economic policies that can be immediately implemented.
The scope of the supplementary budget is emerging as the primary topic, with the minimum level of '30 trillion won plus alpha', which both ruling and opposition parties mentioned during the election. Last month, on the 30th, President Lee mentioned in a campaign rally in Wonju, Gangwon, that candidate Kim's proposal for a 35 trillion won supplementary budget was the minimum, and it should be higher.
However, considering the recent fiscal conditions and the capacity for government bond issuance, there is considerable skepticism about a blanket payment to all citizens. As of last year, Korea's government debt stood at 1,175.2 trillion won, with a debt-to-GDP ratio of 46.1%.
With the possibility of revenue shortfalls unresolved for three consecutive years, including 2023 and 2024, concerns over long-term fiscal sustainability are mounting should the expansionary fiscal stance continue. The consolidated fiscal balance without social security fund deficit was initially expected to be 73.9 trillion won this year.
However, with the passage of a supplementary budget bill of 13.8 trillion won in early April by the National Assembly, the deficit in consolidated fiscal balance without social security fund for this year is expected to swell to 86.4 trillion won. Consequently, the accumulated consolidated fiscal balance without social security fund deficit over 10 years increased from the original 691.5 trillion won to 704 trillion won.
Most of the fiscal deficit is covered by the issuance of treasury bonds. As the scale of treasury bond issuance increases, so do government debt and the debt ratio. In fact, government debt has increased by 653.9 trillion won over the past decade. This year, the issuance of treasury bonds increased by 9.5 trillion won due to the first supplementary budget, and the scale is expected to grow further if the second supplementary budget is pursued.
The additional issuance of government bonds raises the possibility of supply-demand imbalance and interest rate increases in the second half of the year. As the government secured most of its funds early in the year, if the new supply in the market increases in the latter half, bond yield volatility and raising expenses may rise simultaneously.
Ultimately, the key is revenue for this year. National tax revenue until April increased by 16.6 trillion won compared to the previous year, but the progress rate was 37.2%, lower than the five-year average of 38.3%. This suggests that additional government bonds issuance might be necessary even without an additional supplementary budget.
A Ministry of Economy and Finance official noted, "The flow of corporate tax until April is sound, but there are many external variables such as a decrease in tariffs in the second half," adding, "The size and method of the supplementary budget are likely to be decided after the appointment of the deputy prime minister," acknowledging the varying opinions across departments.
Debate also continues regarding policy direction. While universal support payments are being reconsidered, voices emphasizing selective payouts remain. Kim Jeong-sik, an emeritus professor of economics at Yonsei University, noted that if support is provided as local currency, it could contribute to revitalizing local businesses, but deliberations on payment methods and recipients are necessary. He further stated that focusing support on vulnerable groups could be more effective in terms of policy when considering the fiscal situation. He added, "Areas requiring fiscal input are diverse, such as new industries or infrastructure," and emphasized the need to consider both short-term consumption stimulation and mid- to long-term balance.
A shift from the expansionary stance during the election period to a focus on 'fiscal capacity' right after the inauguration is also interpreted as the starting point of responsible fiscal management. Woo Seok-jin, a professor of economics at Myongji University, pointed out, "Whether it's expansionary or contractionary fiscal policy, assessing the current status of finances accurately should come first before determining policy direction," noting that in recent years, the complexities of fund transfers and budget executions have left even government officials unable to clearly grasp the overall fiscal situation.