🚨 Lee Jae-myung Government's 34 Trillion Won Stimulus: Economic Boost vs Fiscal Health Dilemma

Today Korean Economic News | 2025.06.20

📌 30 Trillion Won Budget Announced Just 15 Days After Taking Office, "Active Spending" vs "Tight Budget" Debate

💬 The Lee Jae-myung government announced a 30.5 trillion won supplementary budget on June 18th, just 15 days after taking office, to address weak domestic demand and exports. Combined with the previous 3.5 trillion won budget, this brings the total to 34 trillion won, showing the new government's strong commitment to economic stimulus. The budget includes nationwide consumption coupons, increased infrastructure investment, and stronger support for small businesses. However, experts are divided between those who say "active fiscal policy is needed for economic recovery" and those who argue "fiscal health should come first," creating debate about the policy's effectiveness.

1️⃣ Easy Explanation

The new government has decided to spend a huge amount of money to help the economy. But experts are arguing about whether this policy will really work and if it might cause problems for the country's finances.

"Supplementary budget" might sound complicated, but it simply means "extra money the government spends beyond what it originally planned." Usually, governments create these budgets when the economy gets tough or when there's an emergency, to help boost economic activity.

The size of this budget from Lee Jae-myung's government is really big. The 30.5 trillion won might be hard to imagine, but since Korea's total yearly budget is about 600 trillion won, this represents about 5% of that - a huge amount. Adding the previous budget makes it 34 trillion won total, which is one of the largest supplementary budgets in Korean economic history.

Where will this money go? The most noticeable part is consumption coupons for all citizens. This is similar to the disaster relief payments people received during COVID-19, designed to encourage people to spend money and boost the economy. The government will also invest heavily in infrastructure like roads, railways, and airports to create jobs and bring energy to the economy.

Support for small businesses and self-employed people takes up a big portion too. This includes low-interest loans for small business owners who are struggling due to the recent economic downturn, and policies to reduce their rent and labor costs.

But experts have different opinions. One side argues, "When the economy is this difficult, the government should actively spend money to save it." The other side worries, "It's dangerous to spend money carelessly when the country already has too much debt."

Whether this budget will really help the economy or just burden the country's finances is an important question we'll need to watch in the future.

2️⃣ Economic Terms

📕 Supplementary Budget

A supplementary budget is extra money the government spends beyond the main budget planned at the beginning of the year.

• It's created to respond to unexpected situations like economic recession, natural disasters, or large-scale unemployment.
• It must go through review and approval by the National Assembly, and is usually used for economic stimulus or emergency support.
• Korea typically creates supplementary budgets 1-2 times per year.

📕 Fiscal Health

Fiscal health shows how healthy a government's income, spending, and debt situation is.

• It's measured by things like the ratio of government debt to GDP and the size of budget deficits.
• When fiscal health gets worse, it can lead to problems like lower credit ratings and higher interest rates.
• Korea's national debt is about 54% of GDP, which is better than the OECD average.

📕 Multiplier Effect

The multiplier effect means how much impact on the whole economy happens when the government invests 1 won.

• If the government spending multiplier is 1.5, it means when the government spends 1 trillion won, the whole economy gets a 1.5 trillion won effect.
• During economic downturns, the multiplier effect is usually large, and during good times, it's relatively small.
• Construction investment has a large multiplier effect, but consumer support has a relatively smaller one.

📕 Crowding Out Effect

Crowding out is when increased government spending reduces private investment.

• When the government borrows a lot of money, market interest rates can go up, which can reduce business investment.
• It also includes when government investment in certain areas pushes out private companies from those areas.
• It's considered a side effect of fiscal policy and can reduce policy effectiveness.

3️⃣ Analysis and Economic Outlook

✅ Background of Large-Scale Budget and Economic Situation

• Let's analyze why the Lee Jae-myung government created a large supplementary budget right after taking office.

  • First, serious weakness in domestic demand is the main reason for this budget. Private consumption growth in the first quarter was only 0.1%, showing that domestic economic activity has almost stopped. High interest rates and household debt burdens have made consumers close their wallets, and self-employed people and small business owners are facing increased difficulties. Service industries like restaurants, hotels, and retail have seen particularly noticeable sales decreases. The consumer confidence index has been below 100 for three months in a row, showing continued consumption decline. This domestic recession has led to job losses, with youth unemployment rising above 9%, spreading into social problems.

  • Second, weak exports and manufacturing decline are blocking economic recovery. US protectionist trade policies and China's economic slowdown have greatly reduced exports of Korea's main products like semiconductors, cars, and chemicals. Exports to China dropped 15% compared to last year, giving a big hit to overall export performance. The manufacturing production index has fallen for three months in a row, with factory operation rates dropping to 70%. This has increased concerns about wage cuts and restructuring for manufacturing workers, and regional economic difficulties are getting worse.

  • Third, limitations of existing monetary policy have highlighted fiscal policy. The Bank of Korea's base interest rate remains high at 3.5%, limiting room for further rate cuts. Considering the interest rate difference with the US, rapid rate cuts could cause capital outflows and exchange rate instability, requiring caution. Therefore, fiscal policy has emerged as the main tool for economic stimulus. The Lee Jae-myung government has presented "active fiscal policy for economic recovery" as its core economic policy, justifying large-scale supplementary budget creation.

• Korea's economy currently faces a 'double dip' situation where both domestic demand and exports are weak, making active government intervention unavoidable.

✅ Budget Components and Policy Effect Analysis

• Let's look at the detailed composition of the 30.5 trillion won budget and expected economic effects.

  • First, nationwide consumption coupons take up the largest portion. The 12 trillion won consumption coupon program, giving 250,000 won per person, aims for immediate consumption boost effects. This policy is based on past experience when disaster relief payments temporarily increased consumption by 3-4%. However, consumption coupons may have "substitution effects" where money goes to savings or replaces existing spending, so actual consumption increases might be smaller than the payment amount. Economists estimate the real multiplier effect of consumption coupons at 0.6-0.8 levels, so the 12 trillion won payment might actually increase consumption by about 7-10 trillion won.

  • Second, 10 trillion won is allocated to infrastructure construction investment for job creation. This includes large SOC projects like highway expansion, inter-regional railway connections, and smart city construction. Construction investment has a relatively high multiplier effect of 1.3-1.5, so it's expected to have large economic stimulus effects. The ripple effects on related industries like construction, steel, and cement are also expected to be significant. However, construction investment takes time to actually implement, and shows medium to long-term results rather than short-term effects, so immediate economic stimulus effects may be limited.

  • Third, 8.5 trillion won goes to support small businesses and small merchants. This includes various forms of support like low-interest loan assistance, rent subsidies, labor cost support, and digital transformation cost support. This is expected to help small business owners who have been struggling since COVID-19 survive and maintain employment. Significant budgets are also allocated for youth startup support and women's business development, which should help secure future growth momentum. However, there are concerns that this support might extend the survival of inefficient companies and delay restructuring.

• The budget composition shows a balanced approach pursuing both short-term consumption stimulus and medium to long-term growth foundation building, but efficiency in the actual implementation process will determine success or failure.

✅ Fiscal Health Concerns and Policy Sustainability

• Let's evaluate the impact of large-scale supplementary budgets on national finances and their sustainability.

  • First, concerns are being raised about deteriorating fiscal health due to increased national debt. The 34 trillion won budget is expected to push this year's national debt over 1,150 trillion won. This is about 56% of GDP, still lower than the OECD average (72%), but the rapid increase rate is causing concern. Especially with welfare spending continuously increasing due to population aging, large supplementary budgets could limit future fiscal capacity. The National Planning Office announced that at the current trend, national debt could reach 65% of GDP by 2030.

  • Second, there are skeptical views about fiscal multiplier effects. Some economists point out that in the current low-growth, high-debt situation, the effects of fiscal spending may be limited. Particularly, with household debt reaching 104% of GDP, they question whether consumption coupon payments will actually lead to increased consumption. There's also analysis that government spending increases could cause 'crowding out' effects that reduce private investment, making net effects smaller than expected. The Korea Development Institute (KDI) forecasted that "fiscal multiplier effects in the current situation will only reach about 1.0."

  • Third, strategic thinking about long-term fiscal sustainability is needed. While short-term economic stimulus is important, we also need to find ways to maintain fiscal health in the medium to long term. It's important to secure fiscal capacity through increased tax revenue, spending efficiency, and structural reforms. Particularly, increasing economic pie through productivity improvements and growth potential expansion could be a fundamental solution. The government should increase investment in future growth drivers like digital transformation, green investment, and innovation ecosystem building.

• Balancing fiscal health and economic stimulus is the core challenge of policy, and this should be approached from a medium to long-term perspective.

4️⃣ Conclusion

The Lee Jae-myung government's 34 trillion won supplementary budget is evaluated as an active attempt to bring vitality to Korea's stagnant economy. It shows the government's strong will to act as the last line of defense in the difficult situation where both domestic demand and exports are weak.

Particularly, nationwide consumption coupon payments and infrastructure investment expansion appear to be a strategy to catch two birds with one stone: immediate economic stimulus effects and medium to long-term growth foundation building. Large-scale support for small business owners and small companies struggling since COVID-19 also has meaning in terms of strengthening the social safety net.

However, concerns about fiscal health cannot be ignored. Questions are being raised about whether it's sustainable for the government to increase debt when household debt is already at high levels and low growth continues. Especially with welfare spending expected to surge due to population aging, medium to long-term planning for fiscal capacity preservation is needed.

The success of the policy ultimately depends on efficiency in the implementation process and actual improvement in economic indicators. Past experience shows that the effects of fiscal spending can vary greatly depending on policy design and implementation methods. Therefore, proper budget allocation, transparency in the implementation process, and performance management systems will be key factors for policy success.

It's natural that opinions among experts are divided. Economic situations are complex and uncertain, making it a series of choices without clear answers. What's important is carefully monitoring policy effects and flexibly adjusting according to circumstances.

Whether this supplementary budget can bring new vitality to Korea's economy or just add to fiscal burdens will likely be determined in the next 6 months to 1 year. Changes in the global economic environment, along with the government's policy capabilities, will be important variables.