🚨 Supplementary Budget Controversy and Economic Stimulus: Impact of US Protectionism on Korean Economy

Today Korean Economic News | 2025.05.02

📌 Amid Budget Size Controversy, National Assembly Increases Government Plan by 1.6 Trillion Won... SOC Budget Also Expanded

💬 Following the Q1 growth report of -0.2%, the National Assembly agreed to increase the government's supplementary budget by 1.6 trillion won to stimulate the economy. The SOC (Social Overhead Capital) budget increased by 800 billion won, with additional funding for forest fire recovery, national scholarships, and small business support. Some economic experts argue "at least 20 trillion won in supplementary budget is needed," while the International Monetary Fund (IMF) and credit rating agencies express concerns about fiscal soundness. Meanwhile, strengthened US protectionism and weak domestic demand are increasing uncertainty in the Korean economy.

1️⃣ Easy to Understand

The Korean economy faces multiple challenges. With Q1 growth recording negative figures, controversy surrounding the government's economic stimulus package is growing.

The government prepared a supplementary budget of about 12 trillion won to stimulate the economy, which the National Assembly increased by an additional 1.6 trillion won. This money will mainly support small businesses, forest fire recovery, expanded national scholarships, and SOC (infrastructure) investments.

However, some experts predict this amount will only increase the growth rate by 0.1 percentage point, making its effect minimal. On the other hand, the IMF and others worry that excessive government spending could increase national debt and weaken long-term fiscal health.

At the same time, the US is strengthening its "America First" policy and imposing a 25% tariff on Korean products. This directly impacts Korea's key industries including automobiles, semiconductors, and steel.

The Korean economy shows unbalanced growth with semiconductor industry recovery but continuing weak domestic demand. Household consumption is particularly depressed due to high household debt, rising prices, and a sluggish real estate market.

The government now faces the difficult task of balancing economic stimulus, fiscal soundness, and response to external risks. Effective economic policy requires both short-term stimulus measures and securing long-term growth engines.

2️⃣ Economic Terms

📕 Supplementary Budget

A supplementary budget is an additional budget prepared beyond the already confirmed budget.

• It is prepared during economic crises, natural disasters, or urgent fiscal needs, and is finalized after review and approval by the National Assembly.
• It serves as an expansionary fiscal policy tool during economic downturns to stimulate economic activity.

📕 Fiscal Soundness

Fiscal soundness refers to how healthy a nation's financial state is.

• It is primarily measured by the national debt ratio (national debt size relative to GDP).
• Excessive national debt can increase the burden on future generations and lower a country's credit rating.

📕 Protectionism

Protectionism is a policy of imposing tariffs or non-tariff barriers on imports to protect domestic industries.

• It appears in various forms including tariff impositions, import quotas, and technical regulations.
• While it may provide short-term protection for domestic industries, it can lead to reduced global trade and economic growth slowdown in the long term.

📕 Domestic Demand

Domestic demand includes all consumption and investment occurring within a country.

• It consists of household consumption expenditure, business facility investment, and construction investment.
• It is an important indicator of a domestic economy's basic strength; stronger domestic demand creates an economic structure more resistant to external shocks.

3️⃣ Principles and Economic Outlook

💡 Effects of Supplementary Budget and the Fiscal Soundness Dilemma

• Let's examine the balance point between the economic effects of a supplementary budget and fiscal soundness.

  • First, the economic effect of a supplementary budget varies depending on its size and composition. A supplementary budget is a policy that stimulates the economy by injecting additional government money into the market. In theory, increased government spending contributes to economic growth through a "multiplier effect" where consumption and production increase, leading to employment and income growth. However, the current 13.6 trillion won budget (including National Assembly increases) is only about 0.6% of annual GDP, expected to raise the growth rate by just 0.1-0.2 percentage points. To enhance the budget's effectiveness, focus should be placed on infrastructure investment or R&D support that builds long-term growth engines rather than short-term consumption stimulus.

  • Second, balancing supplementary budgets with fiscal soundness is important. Supplementary budget resources are mainly secured through government bond issuance. However, expanded 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. Increased government bond issuance can create upward pressure on market interest rates, increasing interest burdens for businesses and households, and might cause a "crowding out effect" that reduces private investment. Considering increased welfare spending due to aging and low-growth trends, fiscal capacity must be managed carefully.

  • Third, effective economic stimulus requires various policy combinations. Supplementary budgets alone have limitations for economic recovery, making combinations with monetary policy, regulatory reform, and other policies important. The Bank of Korea should carefully consider interest rate cuts for economic stimulus while considering the interest rate gap with the US. Additionally, efforts are needed to secure future growth engines through unnecessary regulatory relief to stimulate private investment, digital transformation, and eco-friendly industry development. The government needs the wisdom to balance short-term economic stimulus, long-term growth foundation building, and fiscal soundness.

• While a supplementary budget is an important policy tool during economic downturns, its effects and side effects must be comprehensively considered. Rather than focusing on short-term effects, it's important to optimize spending composition toward securing long-term growth engines while maintaining balance with fiscal soundness.

💡 Impact of US Protectionism on Korean Industries

• Let's analyze the impact of US protectionist policies on Korea's key industries and response directions.

  • First, the automobile industry is taking the most direct hit. The US is a core market accounting for about 30% of Korea's automobile export market. The 25% high tariff significantly weakens the price competitiveness of Korean cars, with Hyundai-Kia's US exports expected to decrease by up to 300,000 vehicles. In response, the auto industry is pursuing strategies such as expanding US local production, accelerating electric vehicle transition, and expanding production bases within USMCA regions like Mexico. Especially important are efforts to bypass tariff barriers by expanding electric vehicle production utilizing benefits from the US IRA (Inflation Reduction Act).

  • Second, the semiconductor industry stands at the frontline of US-China conflict. While semiconductors have relatively limited demand reduction from tariffs due to product characteristics and few substitutes, they face the double challenge of US export regulations to China and tariffs on Korea. Fortunately, the semiconductor industry is rapidly recovering due to increased AI demand and completed inventory adjustments, with March production increasing by 47.5% compared to the same month last year. The industry is strengthening competitiveness through securing advanced process technology, expanding US investment, and developing AI semiconductors.

  • Third, refining and petrochemical industries are suffering from weak global demand and margin pressure. International oil prices are at their lowest level in 4 years at around $60 per barrel, with refining margins below $1 per barrel, well below the break-even point (4-5 dollars). Main causes include China's economic downturn and expanded petroleum product exports, and global oversupply. With US tariffs and intensified US-China trade war further shrinking petrochemical product demand, the industry is pursuing business diversification into eco-friendly energy such as hydrogen, battery materials, and biofuels.

• US protectionist policies and US-China trade conflicts pose serious challenges to the Korean economy. Industries need efforts to overcome the crisis through local production expansion, business structure innovation, and strengthened technological competitiveness, while strategically approaching export market diversification and global supply chain reorganization in the long term.

💡 Tasks for Revitalizing the Domestic Economy

• Let's examine the causes of weak domestic demand and policy directions to overcome it.

  • First, we must understand the main causes of weak domestic demand. Korea's domestic economy is depressed by complex factors including high interest rates, household debt burden, price increases, and real estate market stagnation. With the base rate rising to 3.25%, interest burdens for households and businesses have greatly increased, and household debt at about 104% of GDP far exceeds the OECD average, limiting consumption capacity. Also, the burden of essential living costs remains high, depressing household consumption sentiment, while the real estate market slump reduces asset effects, another cause of consumption weakness. In this situation, March retail sales decreased by 0.8% compared to the previous month, with durable goods (-2.4%) and semi-durable goods (-1.2%) sales significantly decreasing.

  • Second, various policy tools are needed to revitalize domestic demand. Supporting small businesses and vulnerable groups through supplementary budgets, and consumption coupons and cashback programs can help stimulate short-term consumption. However, for more sustainable domestic demand recovery, a comprehensive approach is needed including interest rate cuts to reduce interest burdens for households and businesses, regulatory reform to foster new industries and create jobs, and productivity improvement in the service sector. Particularly important is developing industries matching new consumption trends such as digital transformation, eco-friendly consumer goods, and healthcare.

  • Third, a balanced growth structure between domestic demand and exports is important. An economic structure dependent on semiconductor-centered export recovery is inevitably vulnerable to specific industry business fluctuations. Therefore, efforts are needed to strengthen the domestic demand base and diversify the industrial structure. Activating small business and startup ecosystems, strengthening service industry competitiveness, and restoring the middle class through reduced income polarization will contribute to strengthening the domestic economy's constitution. In the long term, an economic structure balancing exports and domestic demand, manufacturing and services will be the foundation for stable growth.

• Revitalizing the domestic economy is essential for creating an economic structure resistant to external shocks. Short-term consumption stimulus measures should be balanced with medium to long-term perspective policies including household income increases, quality job creation, and new industry development through regulatory reform.

4️⃣ In Conclusion

The Korean economy faces complex challenges including weak domestic demand and US protectionism despite semiconductor industry recovery. The first quarter's negative growth clearly shows these difficulties, and finding the balance point between economic stimulus and fiscal soundness has emerged as an important task.

The government and National Assembly are pursuing economic activation through a 13.6 trillion won supplementary budget, but concerns exist that this scale will have limited effect. Meanwhile, caution about national debt increases from a fiscal soundness perspective is growing, intensifying policy dilemmas.

Strengthened US protectionist policies are directly impacting Korea's key industries including automobiles, semiconductors, and steel. Companies are seeking various responses including expanded local production, business structure innovation, and strengthened technological competitiveness, but export reductions and performance deterioration seem unavoidable in the short term.

The domestic economy is depressed by complex factors including high interest rates, household debt, price burdens, and real estate market stagnation. With both consumption and investment weak, a comprehensive policy approach for domestic demand activation is required.

Ultimately, the Korean economy faces the challenge of balancing three goals: short-term economic stimulus, long-term growth foundation building, and securing fiscal soundness. This difficult period must be wisely overcome through government policy capacity, corporate innovation efforts, and social consensus.