President Lee Jae-myung is presiding over the second meeting of the Emergency Economic Inspection TF held at the Presidential Office in Yongsan, Seoul on the 9th./Courtesy of News1

The government officially announced on the 19th the formation of a supplementary budget of 30.5 trillion won to promote consumption and revitalize the construction industry. This follows President Lee Jae-myung's commitment to a prompt supplementary budget plan to overcome the economic slump from the very first day of his term. The new government submitted the supplementary budget proposal to the National Assembly 20 days after its inauguration. If we include the 'essential supplementary budget' passed by the National Assembly last month, a total of 35 trillion won in fiscal and financial support is expected to be disbursed.

To fund this supplementary budget, the government will issue 20 trillion won in deficit government bonds. In the midst of prolonged domestic stagnation due to poor consumption and construction, the government has decided to increase national debt to stimulate economic recovery. As a result of this supplementary budget, the national debt ratio compared to Gross Domestic Product (GDP) will rise from 48.4% to 49%.

Meanwhile, some economic experts have raised concerns that the effects of this supplementary budget may be limited to short-term consumption stimulation. There are also worries that the supplementary budget could trigger inflation and negatively impact fiscal soundness if an expansionary fiscal policy continues.

◇ Government to inject 20.2 trillion won for economic recovery and stabilization of livelihoods... 'Will raise GDP by 0.1% this year'

The government deliberated and approved the supplementary budget proposal of 30.5 trillion won at a Cabinet meeting this day. This supplementary budget consists of 20.2 trillion won for increased expenditure and 10.3 trillion won for adjusted revenue. With this supplementary budget following the first one, total government expenditure for the year will increase to 702 trillion won, an increase of 28.7 trillion won compared to the original budget.

By sector, 11.3 trillion won is allocated to bolster consumption capacity, 2.7 trillion won to revitalize the construction industry, and 1.2 trillion won to promote investment in new industries. Additionally, it includes ▲ 1.4 trillion won for small business recovery support ▲ 1.6 trillion won for strengthening employment safety nets ▲ 700 billion won for supporting vulnerable groups and price stability ▲ 1.3 trillion won for local fiscal reinforcement.

The most noteworthy items are the 'livelihood recovery consumption vouchers' and 'local love gift certificates.' The government will invest 10.3 trillion won to provide each citizen with consumption vouchers ranging from 150,000 to 500,000 won in stages. In the first round, 300,000 won will be given to those in the lower-income bracket, 400,000 won to basic livelihood recipients, and 150,000 won to the rest of the population, while the second round will provide an additional 100,000 won to all citizens except the top 10% of income earners. Support will also be extended for the issuance of local gift certificates, reaching an all-time high of 29 trillion won.

Support for project financing (PF) to invigorate the construction industry is also notable. The government plans to invest 5 trillion won to provide about 3 trillion won in financial liquidity through PF financial support. Additionally, they will purchase 10,000 unsold dwellings under a buy-back agreement by 2028, and actively promote the early commencement and completion of major infrastructure projects such as railways and ports.

The government aims to secure momentum for economic recovery through this supplementary budget. In fact, the economic growth rate for the first quarter of this year recorded a decline compared to the same period last year, with private consumption (-0.1%) and equipment investment (-0.4%) also showing negative growth compared to the previous quarter. The Bank of Korea and the Korea Development Institute (KDI) each projected this year's economic growth rate at 0.8%, while Société Générale lowered its forecast for South Korea's economic growth rate to 0.3%.

Vice Minister Im Gi-hoon stated, 'The effects of tariff shocks, poor consumption, and construction investment are drastically diminishing the growth engine of our economy' and noted, 'We will break the vicious cycle of difficulties in livelihoods and insolvency in vulnerable sectors, and revert to a virtuous cycle in the economy.'

The government expects this supplementary budget to raise the GDP growth rate by 0.1 percentage points (p). Vice Minister Im mentioned, 'I believe this supplementary budget will raise the GDP growth rate by 0.2 percentage points (p), but since the timing of the policy implementation is in the second half of the year, the impact on this year's economic growth rate will likely be about 0.1 p.'

◇ Will the effects of consumption stimulation be short-lived... Concerns over fiscal soundness and inflation also arise

Citizens are shopping at Gyeongdong Market in Dongdaemun, Seoul on the 9th morning./Courtesy of News1

Experts express that while this supplementary budget may help improve consumer sentiment, the effects might be limited. The livelihood recovery consumption vouchers and local love gift certificates may induce consumption in the short term, but there are concerns they could trigger side effects like inflation.

Professor Kim Sang-bong from Hansung University noted, 'There might be effects of increased consumption for a month or two, but negative outcomes like inflation could follow.' Heo Hyun-seok, a deputy research fellow at the Bank of Korea's economic research institute, also previously stated, 'Expansive fiscal policies have significantly affected inflation, along with deteriorated fiscal soundness and increased government liabilities,' and that 'fiscal policy in a deficit situation tends to have a more substantial inflation-inducing effect than in a surplus situation.'

Concerns are also raised about the potential side effects if the support effects of consumption vouchers and local love gift certificates are concentrated among a few. Professor Woo Seok-jin from Myongji University mentioned, 'While the method of consumption vouchers may be inefficient, aspects of it are unavoidable in the current situation,' and added, 'However, as consumption may be concentrated among specific groups, policies allowing struggling small business owners to close their businesses and providing re-education for new opportunities should also be implemented alongside the supplementary budget.'

There are also concerns that the issuance of 20 trillion won in government bonds could stimulate funding rates or further decrease the popularity of corporate bonds. Professor Kim stated, 'We are currently in a situation where interest rates need to be lowered, but the issuance of deficit government bonds may stimulate capital procurement rates,' suggesting that 'providing funding to small and technology companies to induce employment might have been a more effective way to stimulate consumption and the market.'

Some analysts have pointed out that with the Lee Jae-myung government's policies leaning towards expanding fiscal measures, concerns over fiscal soundness have increased. Due to this supplementary budget, the estimated fiscal deficit for this year has risen from 86.4 trillion won to 110.4 trillion won. The fiscal deficit compared to GDP has also increased from -3.3% to -4.2%.

However, President Lee has maintained the position that money that needs to be spent should be spent rather than trying to control national debt. Vice Minister Im also mentioned at the press conference held on the 17th regarding the new government's supplementary budget proposal that 'a reassessment of the practicality and feasibility of rigid fiscal rules is necessary,' noting that 'strictly adhering to fiscal rules under the current fiscal and economic conditions may likely lead to side effects at this stage.'

Professor Heo Jun-young from Sogang University stated, 'If the government continues to pursue expansionary policies, the ratio of national debt to GDP will inevitably rise,' emphasizing the need to consider what methods can increase GDP and activate industries in the long term rather than relying on short-term stimulation policies.