🚨 Korean Economy Faces Negative Growth Risk: Discussions on Supplementary Budget Expansion and Industry Promotion Policies
Today Korean Economic News | 2025.04.29
📌 Growing Discussions of Second Supplementary Budget Amid Recession Concerns... Government Emphasizes "Cautious Approach"
💬 While the government is proceeding with a 12.2 trillion won first supplementary budget, the need for a second supplementary budget is increasing due to expanding domestic and international economic uncertainties. Recently, the IMF lowered Korea's economic growth forecast for this year from 2.3% to 1.8%, and downside risks to the economy are growing due to strengthened US protectionism, Chinese economic downturn, and weak domestic demand. As calls for additional measures grow in the National Assembly, the government is struggling to find a balance between fiscal soundness and economic stimulus.
1️⃣ Easy Understanding
As the Korean economy faces various crises, there are growing calls for additional measures. Let me explain the current situation, the government's response plans, and future prospects in an easy-to-understand way.
The Korean economy is currently facing difficulties both externally and internally. Externally, the US has imposed a high 25% tariff on Korean products, making exports difficult, while the Chinese economy is experiencing a slowdown and not purchasing our products as much as before. Internally, consumption and investment are not active, leaving the domestic market in a state of depression.
In this situation, the government has prepared a supplementary budget of 12.2 trillion won to revitalize the economy. This money will be used to support small business owners and vulnerable groups experiencing difficulties, as well as export companies. However, many experts point out that this scale will only raise the economic growth rate by 0.1 percentage point, which will have minimal effect.
Especially as the International Monetary Fund (IMF) recently lowered Korea's economic growth forecast for this year from 2.3% to 1.8%, the sense of crisis is intensifying. The National Assembly and economic organizations are arguing that a second supplementary budget is necessary.
However, increasing the supplementary budget requires issuing more government bonds, which can cause two problems. First, as the supply of government bonds in the market increases, interest rates rise, which can lead to increased loan burdens for households and businesses. Second, national debt may increase, potentially worsening fiscal soundness.
Along with expanding the supplementary budget, the government is also considering various industry support measures such as expanding agricultural disaster insurance, implementing rice market isolation measures, and fostering renewable energy industries. The government believes that both short-term economic stimulus and medium to long-term industrial competitiveness strengthening are necessary. Ultimately, the government is struggling to find a balance between short-term crisis response, long-term structural improvement, and fiscal soundness.
2️⃣ Economic Terms
📕 Negative Growth
Negative growth refers to the phenomenon where the economy shrinks compared to the previous period, meaning a decrease in Gross Domestic Product (GDP).
- Two consecutive quarters of negative growth is called a Technical Recession.
- Consumption contraction, investment decrease, and export slump can be major causes.
📕 Supplementary Budget
A supplementary budget is an additional budget prepared beyond the already established and confirmed budget.
- It is prepared during economic crises, natural disasters, or urgent fiscal needs, and is confirmed through the National Assembly's deliberation and resolution.
- It is used as an expansionary fiscal policy tool during economic downturns to stimulate the economy.
📕 Disaster Insurance
Disaster insurance is an insurance system that compensates for damage to agricultural crops and facilities caused by natural disasters.
- The government supports 50-80% of the insurance premium to reduce the burden on farmers.
- It covers damages caused by various natural disasters such as typhoons, floods, droughts, hail, and forest fires.
📕 Market Isolation
Market isolation is a policy where the government isolates a certain amount of agricultural products from the market to stabilize agricultural product prices.
- When prices fall due to oversupply, agricultural products are purchased from the market to adjust the supply volume.
- Purchased agricultural products are stored as inventory or converted for processing, feed, etc.
3️⃣ Principles and Economic Outlook
💡 Economic Effects of Supplementary Budget and the Fiscal Soundness Dilemma
Let's analyze the economic effects of the supplementary budget and the dilemma between it and fiscal soundness.
First, the economic effect of the supplementary budget varies depending on its scale and composition. A supplementary budget is a policy where the government injects additional money into the market to stimulate the economy. Theoretically, increased government spending contributes to economic growth through a 'multiplier effect' where production and consumption increase, leading to increased employment and income. The current 12 trillion won supplementary budget prepared by the government corresponds to about 0.5% of GDP and is expected to raise the growth rate by only 0.1 percentage point. Many argue this is insufficient considering the severity of the current economic downturn. Some experts claim "a supplementary budget of at least 25 trillion won, which is more than 1% of GDP, is necessary." The composition of the supplementary budget is also important; the current one focuses on stimulating consumption through support for small business owners and vulnerable groups. Some suggest increasing the proportion of investments in R&D and support for eco-friendly and digital transformation for long-term growth engine expansion.
Second, expanding the supplementary budget raises concerns about worsening fiscal soundness. The resources for the supplementary budget are mainly secured through government bond issuance. However, expanded government bond issuance can lead to increased national debt, potentially worsening long-term fiscal soundness. Korea's national debt is about 55% of GDP as of 2025, lower than the OECD average (about 110%) but rapidly increasing. Considering increased welfare spending due to aging and decreased productive population due to low birth rates, fiscal capacity is gradually decreasing. International credit rating agencies express concerns about the rate of increase in Korea's national debt, and excessive government bond issuance could lead to a downgrade in the country's credit rating. Additionally, increased government bond issuance could put upward pressure on market interest rates, raising interest burdens for businesses and households.
Third, finding a balance point for effective fiscal policy is crucial. Finding a balance between economic downturn and fiscal soundness is key. In the short term, bold fiscal input is needed to prevent economic decline, but medium to long-term fiscal soundness must also be considered. Several approaches are being discussed for this. First, expanding the supplementary budget while increasing spending efficiency. For example, increasing the proportion of investments in R&D, infrastructure, and human capital that enhance growth potential, while limiting simple consumption expenditure to essential parts. Second, introducing fiscal rules to clearly demonstrate the will to manage national debt. The government can prepare a legal mechanism to maintain the national debt ratio below a certain level, and based on this, secure policy flexibility to respond to the current crisis situation. Third, creating an institutional environment that induces private investment. By relaxing regulations and providing tax support, enhancing the vitality of the private sector can maximize the effect of fiscal input.
Finding a balance between economic stimulus through the supplementary budget and fiscal soundness is not an easy task. While fiscal expansion is necessary for short-term economic recovery, medium to long-term fiscal sustainability must also be considered. Particularly important is a strategy that maximizes the effect of fiscal input through improved spending efficiency, enhanced growth potential, and revitalization of the private sector.
💡 Industry Challenges and Response Strategies
Let's look at the challenges faced by major industries and the government's industry-specific response strategies.
First, export-driven industries such as automobiles and semiconductors are struggling due to strengthened US protectionism. The US has imposed high tariffs of 25% on Korean automobiles and over 20% on semiconductors, significantly weakening export competitiveness. Especially for the automobile industry, the US is a major export market, and exports are expected to decrease by about 30% due to tariffs. In response, the government is pursuing ▲investment support for expanding US local production ▲R&D support for accelerating electric vehicle transition ▲trade negotiations for diversifying export markets to third countries. For the semiconductor industry, the government is preparing measures such as ▲expanded R&D investment for securing advanced process technology ▲fostering high value-added fields such as system semiconductors and AI semiconductors ▲strengthening international cooperation for stabilizing the global supply chain. These policies focus on mitigating the impact of short-term export reductions while advancing the industrial structure in the medium to long term.
Second, the agricultural sector needs structural adjustment to adapt to climate change and market opening pressures. Recently, as natural disasters such as forest fires and floods increase, damage to the agricultural sector is expanding. Additionally, pressure from major countries like the US to import agricultural products is also increasing, creating a double hardship. In response, the government is pursuing ▲policies to increase disaster insurance enrollment from the current 40% to 70% within the next 5 years ▲market isolation measures for rice price stability (300,000 tons scale) ▲strategic approach in rice mandatory import quantity negotiations with the US. Particularly, policies are designed to strengthen competitiveness through smartification and high value-addition of agriculture. Major strategies include developing climate change-resistant varieties, expanding smart farms using ICT technology, and sixth industrialization linked with rural tourism. This approach goes beyond simple protection policies to enhance the structural competitiveness of agriculture.
Third, energy and petrochemical industries are facing global demand downturn and pressure for eco-friendly transition. As international oil prices hover around $60 per barrel, refining margins have fallen below the break-even point (4-5 dollars), deteriorating profitability. Additionally, pressure for transition to eco-friendly energy due to carbon neutrality policies is increasing. In response, the government is pursuing ▲technology development support for high value-addition of the petrochemical industry ▲institutional support for fostering eco-friendly energy industries such as hydrogen and renewable energy ▲a phased approach to mitigate the impact during the carbon neutrality transition. Especially as part of the Green New Deal, policies are being pursued to increase the proportion of renewable energy generation, expand the supply of electric and hydrogen vehicles, and increase investment in carbon capture and utilization technology (CCUS) development. This is a strategy to help the structural transformation of traditional energy industries while securing new growth engines.
Although the challenges faced by each industry are different in nature, the basic direction of the government's response can be summarized as 'parallel short-term shock mitigation and medium to long-term structural improvement.' Particularly, the focus is on transforming the industrial structure in line with global megatrends of digitalization, eco-friendliness, and high value-addition. However, social consensus on how to share and mitigate the costs and pain arising during this transition process is important.
💡 Policy Direction for Economic Recovery
Let's explore comprehensive policy directions and tasks for economic recovery.
First, short-term economic stimulus and medium to long-term structural improvement should be pursued in a balanced way. A dual approach is needed to respond to the current economic downturn while solving the structural problems of the Korean economy. In the short term, policies to stimulate consumption and investment are important. The government is revitalizing domestic demand through supporting vulnerable groups via the supplementary budget, providing financial support to small business owners, and offering temporary tax benefits. It is also expanding trade finance for supporting export companies and supporting overseas market development. In the medium to long term, structural reforms are needed to strengthen the constitution of the Korean economy. Key tasks include securing flexibility and stability through labor market reform, fostering new industries through regulatory innovation, and training future talent through educational innovation. Particularly important is strategic investment and support for future growth engine industries such as AI, robotics, biotech, and eco-friendly energy.
Second, an effective combination of fiscal, monetary, and industrial policies is needed. To respond to complex crises, various policy tools must be used harmoniously. In terms of fiscal policy, active expenditure expansion through the supplementary budget should be pursued in a balanced way with improved spending efficiency and expanded revenue base. In terms of monetary policy, the Bank of Korea needs to carefully consider interest rate cuts while comprehensively considering the interest rate difference with the US, inflation, and financial stability. In terms of industrial policy, support for export industries in response to protectionism, strengthening of domestic industrial ecosystems, and fostering of new growth industries should be pursued. Particularly, the government needs to pursue inclusive growth policies to ensure no companies or workers are left out in the digital and eco-friendly transition process.
Third, managing external risks and strengthening global cooperation are important. Considering the high external dependency of the Korean economy, effectively responding to changes in the global economic environment is important. First, in response to US protectionist policies, multi-faceted strategies such as trade negotiations, expanding local production, and diversifying export markets are needed. Additionally, efforts to reduce dependence on China and diversify markets to Southeast Asia, India, the Middle East, etc. are important. Policies to improve the stability of the supply chain of core industries and strengthen the self-sufficiency of strategic industries in response to global supply chain reorganization are also needed. On the other hand, diplomatic efforts for international coordination to prevent the spread of protectionism and strengthen the multilateral trade system should be pursued in parallel.
To overcome the complex challenges facing the Korean economy, short-term economic stimulus and medium to long-term structural improvement, harmonious operation of fiscal, monetary, and industrial policies, and management of external risks and strengthening of global cooperation are needed. Particularly important is building a more resilient and sustainable economic system through industrial structure advancement, strengthening technological innovation capabilities, and balanced development of domestic demand and exports.
4️⃣ In Conclusion
The Korean economy is facing a negative growth crisis as domestic and foreign risks simultaneously expand, including strengthened US protectionism, Chinese economic downturn, and weak domestic demand. The IMF has lowered Korea's economic growth forecast for this year from 2.3% to 1.8%, and some private research institutions are presenting pessimistic forecasts that even 1% growth might be difficult. As criticism grows that the 12 trillion won first supplementary budget prepared by the government is insufficient for response, the need for a second supplementary budget is being raised.
The government is preparing industry-specific customized support measures along with expanding the supplementary budget. For export-driven industries such as automobiles and semiconductors, it is supporting expanded US local production, technological advancement, and market diversification. In the agricultural sector, it is pursuing farmer income stability through expanded disaster insurance and rice market isolation measures. For energy and petrochemical industries, it is expanding R&D investment for supporting eco-friendly transition and high value-addition.
However, expanding the supplementary budget is accompanied by concerns about worsening fiscal soundness. Increased national debt can act as upward pressure on interest rates and raise concerns about long-term fiscal sustainability. Particularly considering structural fiscal pressure factors due to aging and low birth rates, voices calling for a cautious approach are also strong.
Ultimately, to overcome the current crisis, the Korean economy needs to pursue short-term economic stimulus and medium to long-term structural improvement in a balanced way. Fiscal expansion alone cannot solve structural problems, and a comprehensive approach such as strengthening industrial competitiveness, labor market reform, and regulatory innovation is needed. Particularly, transforming the industrial structure in line with global megatrends of digitalization, eco-friendliness, and high value-addition will be the key to long-term growth.