🚨 35 Trillion 'Super Supplementary Budget' Announcement and Government Bond Issuance Controversy
Today Korean Economic News | 2025.02.15
📌 35 Trillion 'Super Supplementary Budget' Announced... Government Bond Issuance Inevitable After All
💬 The Democratic Party of Korea has announced a supplementary budget proposal of 35 trillion won, suggesting 'fund utilization' and 'expenditure restructuring' as methods to secure financial resources, but analysis suggests that most of the resources will inevitably have to be covered by issuing government bonds.
1️⃣ Easy to Understand
The Democratic Party of Korea has announced a supplementary budget proposal (supplementary budget) of 35 trillion won. This is the largest scale in history and is being called a 'super supplementary budget.' However, there is controversy about whether the funding methods for this massive supplementary budget are realistically feasible. I'll explain this in simple terms.
A supplementary budget refers to an additional budget that is formulated when unexpected situations occur or additional fiscal expenditure is needed after a country has already prepared its budget for the year (main budget). Simply put, it's similar to a situation where you've planned your monthly living expenses but suddenly need additional spending because your refrigerator breaks down.
The supplementary budget announced by the Democratic Party this time is 35 trillion won, which is a 'super supplementary budget' much larger than typical supplementary budgets. To understand how large 35 trillion won is, it represents about 5.4% of the Korean government's 2024 main budget (about 650 trillion won). In household budget terms, it's similar to a family with a monthly income of 5 million won suddenly needing an additional 270,000 won in spending.
The Democratic Party has proposed 'fund utilization' and 'expenditure restructuring' as the main methods to secure resources for this massive supplementary budget. Fund utilization means using money that the government manages separately for specific purposes (e.g., National Pension Fund, Employment Insurance Fund, etc.), and expenditure restructuring means reducing less important or unnecessary parts of the existing budget to spend elsewhere.
However, experts point out that it is realistically difficult to cover the large amount of 35 trillion won through funds or expenditure restructuring alone. This is because most funds are already planned for specific purposes, and it is not realistically easy to implement large-scale restructuring in the short term. The consensus is that resources will inevitably have to be secured by issuing government bonds (bonds issued by the country).
Simply put, issuing government bonds means the country is borrowing money. Similar to an individual taking out a loan from a bank, the government borrows money from investors by issuing government bonds and later repays it with interest. The problem is that this borrowed money eventually has to be repaid in the future, which could worsen fiscal soundness and increase the burden on future generations. Currently, Korea's national debt ratio is about 50% of GDP, and additional government bond issuance raises concerns that this ratio will rise further.
2️⃣ Economic Terms
📕 Supplementary Budget
Supplementary budget is a budget that is formulated to respond to unexpected fiscal needs after the main budget has been prepared.
- It is formulated when unexpected fiscal needs arise such as economic recession, natural disasters, or national crises.
- It is confirmed through deliberation and resolution by the National Assembly and may be formulated multiple times depending on the economic situation.
📕 Government Bonds
Government bonds are bonds issued by the government to secure finances and can be a burden on future generations.
- They are perceived as relatively safe investment vehicles as they are issued based on government credit, but excessive issuance can worsen national fiscal soundness.
- The interest and principal of issued government bonds must be repaid with future tax revenue, thus having an aspect of transferring the burden to future generations.
📕 Fiscal Soundness
Fiscal soundness refers to the degree to which the government's fiscal status is sound and sustainable.
- It is evaluated by national debt ratio (relative to GDP), fiscal balance (deficit or surplus), and efficiency of government spending.
- If fiscal soundness deteriorates, problems such as downgrading of national credit ratings, increased interest burden, and reduced economic stability can occur.
📕 Funds
Funds are monies established and operated separately for specific purposes, having different operational methods than the budget.
- There are various types such as the National Pension Fund, Employment Insurance Fund, Housing Urban Fund, etc., which are established for specific purposes and operated relatively more autonomously than the budget.
- As funds are managed separately from the general account, there are legal and institutional constraints on transfers between funds or utilization as general budget.
3️⃣ Principles and Economic Outlook
💡 Background and Main Content of the 'Super Supplementary Budget'
The 35 trillion won supplementary budget proposal suggested by the Democratic Party has been presented under the justification of responding to economic recession and stabilizing people's livelihoods, with notable characteristics in its scale and content.
First, the scale of this supplementary budget is historically large. 35 trillion won is the largest among historical supplementary budgets, comparable to the 2020 supplementary budget for COVID-19 response (35.1 trillion won, based on the 3rd supplementary budget). Considering that typical supplementary budgets for economic stimulation were around 10-20 trillion won, this is a considerably large fiscal injection. Such large-scale fiscal expansion reflects a perspective emphasizing crisis recognition of the current economic situation and the need for active fiscal policy.
Second, looking at the main expenditure items, the focus is on livelihood areas such as support for small and medium-sized enterprises and small business owners, expansion of welfare for vulnerable groups, and regional economic revitalization. Specifically, fiscal support is planned across various areas including emergency management stabilization funds for small business owners (5 trillion won), youth housing support (3 trillion won), energy price stability support (2 trillion won), and regional SOC projects (4 trillion won). This is interpreted as an intention to alleviate the difficulties of the common people's economy due to recent economic recession and inflation, and to promote economic recovery through domestic demand stimulation.
Third, it is noteworthy that 'fund utilization' and 'expenditure restructuring' have been presented as funding methods. The Democratic Party has announced plans to secure resources through contingency reserves under the National Finance Act (2 trillion won), surplus funds from various funds (about 10 trillion won), expanded investment by public institutions (5 trillion won), and restructuring of existing budgets (8-10 trillion won). This appears to be an approach aimed at minimizing additional government bond issuance and pursuing economic stimulation effects while maintaining fiscal soundness.
Fourth, this supplementary budget proposal also has significance in the political context. The fact that the Democratic Party, the opposition party, has proactively proposed a supplementary budget in a situation where the opposition holds a majority in the National Assembly, and that its scale is quite large, carries the character of criticism of and alternative presentation to the current government's economic policies. This also foreshadows intense policy debates between the ruling and opposition parties during the upcoming budget deliberation process.
The proposal of such a 'super supplementary budget' is generating various perspectives and debates about the diagnosis of and response direction to the current economic situation. Particularly, it is a time that requires examination of the appropriateness of its scale and the feasibility of funding methods.
💡 Inevitability of Government Bond Issuance and Its Impact
There are forecasts that government bond issuance will be inevitable to secure resources for the 35 trillion won 'super supplementary budget,' and various economic impacts are expected from this.
First, there is analysis that it is realistically difficult to secure 35 trillion won with just the proposed funding methods. In the case of surplus funds, most are already planned for specific purposes or have legal restrictions on utilization. For example, the National Pension Fund is for future pension payments and is difficult to divert to general finances, and other funds also have legal constraints that they must be operated according to their respective establishment purposes. Additionally, the dominant assessment is that achieving expenditure restructuring of 8-10 trillion won in the short term is not realistically easy. This is because discontinuing or reducing projects already in progress entails social and economic costs and could face considerable political resistance.
Second, the impact of expanded government bond issuance on financial markets and the macroeconomy should be considered. Large-scale government bond issuance can act as upward pressure on market interest rates. This could lead not only to increased interest burden for the government but also to rising loan interest rates for businesses and households, potentially contracting private investment and consumption. Additionally, if government bond interest rates surge depending on supply and demand conditions in the government bond market, there is a possibility that volatility across the financial market could expand. For example, one of the main causes of the fiscal crisis in Southern European countries in the early 2010s was excessive government bond issuance and the resulting interest rate surge.
Third, concerns about worsening fiscal soundness due to the rise in the national debt ratio are also important considerations. Currently, Korea's national debt ratio is around 50% of GDP, which is lower than the OECD average (about 120%), but there are concerns that it is increasing rapidly. The additional issuance of 35 trillion won in government bonds represents an increase of about 1.5 percentage points in the national debt ratio to GDP, which could act as a burden on mid to long-term fiscal management. International credit rating agencies are watching the trends in Korea's fiscal soundness, and rapid fiscal expansion could negatively impact credit ratings.
Fourth, intergenerational equity issues should also be considered. Fiscal expenditure through government bond issuance has an aspect of transferring the burden to future generations for the benefit of the current generation. Especially in Korea, where aging is progressing rapidly, the structural problem arises where a decreasing working-age population has to bear increasing national debt. Therefore, fiscal expansion through government bond issuance needs careful examination of its effectiveness and sustainability.
While government bond issuance for large-scale supplementary budgets has inevitable aspects, comprehensive consideration of various economic impacts and side effects is necessary. Particularly, finding a balance between short-term economic stimulation effects and mid to long-term fiscal burden can be considered an important task.
💡 Fiscal Policy Dilemma and Optimal Approach
The dilemma between active fiscal policy for responding to economic recession and maintaining fiscal soundness is an important topic in modern economics, and there are various perspectives on the optimal approach in the current situation of the Korean economy.
First, it is important to judge the role of fiscal policy from a cyclical perspective and the current position of the Korean economy. In traditional Keynesian economics, it is considered desirable to stimulate aggregate demand and activate the economy through active fiscal expansion during economic recessions. The current Korean economy shows characteristics of an economic downturn such as weak domestic demand, delayed export recovery, and labor market instability, which from this perspective could justify bold fiscal expansion. In fact, Korea's growth rate for 2024 is expected to be around 2%, which is below the potential growth rate.
Second, fiscal multiplier effects and directing fiscal input to the right places are key elements. The fiscal multiplier is an indicator that shows how much GDP increases with a 1-unit increase in government spending, and is an important criterion for gauging the effectiveness of fiscal policy. Generally, SOC investment, R&D support, and transfer payments to low-income groups are known to have relatively high fiscal multipliers. Therefore, if fiscal input is made through a supplementary budget, it is desirable to focus on areas that can contribute not only to short-term consumption stimulation but also to building mid to long-term growth engines.
Third, securing trust in fiscal discipline and sustainability is also an important element. According to the Ricardian equivalence theorem by American economist Robert Barro, rational economic agents anticipate that fiscal expansion by the government will lead to future tax increases and adjust their current consumption and investment. This suggests that the effects of fiscal policy may be limited. This phenomenon could be more pronounced in situations where concerns about fiscal soundness are high. Therefore, it is important to secure market trust by clearly presenting a mid to long-term fiscal consolidation plan along with fiscal expansion.
Fourth, harmonious operation with monetary policy should also be considered. Fiscal policy and monetary policy are the two axes of macroeconomic management and can have optimal effects when operated complementarily. Currently, the Bank of Korea is maintaining its base rate at a relatively high level (3.5%) for price stability, and there are concerns that a large-scale fiscal expansion could conflict with monetary policy if it acts as inflationary pressure. Therefore, close policy coordination between fiscal authorities and monetary authorities is needed at this point.
Fifth, the role of fiscal policy in solving structural problems of the Korean economy is also important. Beyond short-term economic response, ways for fiscal policy to contribute to solving structural challenges faced by the Korean economy such as low birthrate and aging population, productivity stagnation, and industrial structure transition should be sought. This means fiscal investment directed towards enhancing future growth potential rather than simple consumption stimulation.
Thus, fiscal policy faces the difficult task of finding a balance between economic response and fiscal soundness, and between short-term effects and long-term sustainability. This is a time that requires wisdom to accurately diagnose the current situation of the Korean economy and simultaneously pursue efficient allocation of fiscal resources and ensuring soundness.
4️⃣ In Conclusion
The announcement of the 35 trillion won 'super supplementary budget' is triggering important discussions about the challenges facing the Korean economy and the direction of fiscal policy to address them. While the need for active fiscal policy to respond to economic recession and livelihood difficulties is acknowledged, it is a time that requires careful examination of its scale, funding methods, and mid to long-term impacts.
From a short-term perspective, a supplementary budget of 35 trillion won can contribute to economic recovery through domestic demand stimulation and support for vulnerable groups. In particular, fiscal input into areas where economic difficulties are currently concentrated, such as support for small business owners and small and medium-sized enterprises, youth jobs and housing support, and energy price stability, can help mitigate downside risks to the economy. However, it is important to design such fiscal expenditure so that it goes beyond one-time consumption stimulation and leads to solving structural problems and enhancing growth potential.
From a mid to long-term perspective, concerns about worsening fiscal soundness due to expanded government bond issuance cannot be overlooked. While Korea's current national debt ratio is lower than the OECD average, rapid increases in national debt can lead to transferring burdens to future generations in a situation where potential fiscal burdens are large due to low birthrates and an aging population. Therefore, it is essential to clearly present a mid to long-term fiscal consolidation plan along with fiscal expansion through a supplementary budget to secure market trust.
From a policy perspective, the feasibility and efficiency of funding methods should be closely examined. While fund surplus utilization and expenditure restructuring are ideal, they have large practical constraints, so if inevitably dependent on government bond issuance, efforts to optimize its scale and method are needed. Also, priorities for fiscal input should be clearly established so that limited resources can be concentrated in areas with large economic and social effects.
From a political perspective, rational policy discussions and compromises between the ruling and opposition parties are important. As the supplementary budget proposal must go through deliberation and resolution by the National Assembly, there is a high possibility that its scale and content will be changed during the negotiation and adjustment process between the ruling and opposition parties. It is desirable to focus on the essential goals of economic rationality and promoting public welfare rather than political interests in this process.
In summary, the 35 trillion won 'super supplementary budget' presents the task of finding a balance between the justification of responding to economic recession and concerns about worsening fiscal soundness. It is important to design policies in the direction of appropriate balance between short-term economic stimulation and mid to long-term fiscal sustainability, and maximizing the efficiency and effectiveness of fiscal input. If government bond issuance is inevitable, this is a time when, above all, it is necessary to minimize its scale and secure public trust through transparent fiscal management.