🚨 Next Year's Budget Review Minefield
Today Korean Economic News for Beginners | 2025.11.07
0️⃣ Ruling and Opposition Parties Clash Over US Investment, AI, and Local Currency
📌 $20 Billion Cash Investment Funding Unclear, AI 10 Trillion Won and Local Currency 1 Trillion Won Exemption Controversy
💬 As next year's budget review gets serious, ruling and opposition parties are clashing hard over raising funds for US investment, surging AI budgets, and issuing local currency. The government promised to invest $20 billion (about 28 trillion won) in cash to the US every year following the Korea-US tariff agreement, but the specific funding plan remains unclear. The ruling party claims foreign exchange asset operation profits and issuing foreign currency bonds are enough, but the opposition argues fiscal burden is unavoidable and requires parliamentary approval. Additionally, major projects like 10.1 trillion won for AI budget and 1.15 trillion won for local currency are facing cuts amid controversy over exemptions from preliminary feasibility studies, making the budget review difficult. Experts warn that "if we fail to secure both fiscal transparency and efficiency, market uncertainty could increase."
1️⃣ Easy Explanation
The parliament is reviewing next year's national budget, and the ruling and opposition parties are fighting hard over several issues. The debate is especially hot about how to raise money to invest in the US, whether the AI industry budget is appropriate, and whether issuing local currency is effective.
Let's start with the biggest issue: US investment. The government promised to invest $20 billion in cash to the US every year, which is about 28 trillion won in Korean money, as part of tariff negotiations. This will be done by buying US Treasury bonds or corporate bonds.
The problem is how to raise this huge amount of money. The government says, "The Bank of Korea earns enough profit from managing foreign exchange reserves (foreign exchange asset operation profits), so don't worry." Actually, last year the Bank of Korea made about 30 trillion won from foreign exchange operations. The logic is that using $20 billion from that should be no problem.
But the opposition party and some experts shake their heads. "Foreign exchange operation profits vary greatly each year. When international interest rates are high like now, we make a lot, but when rates fall, profits also drop." Moreover, these profits are originally meant to increase foreign exchange reserves or maintain financial stability. If we spend it all on US investment, our crisis response ability could weaken.
The bigger problem is when foreign exchange operation profits alone are not enough. The government says, "If it's not enough, we can issue foreign currency bonds." Foreign currency bonds mean borrowing money from overseas investors and paying interest in dollars. Simply put, it's the country taking on debt.
Let me explain with an example. Mr. A wants to buy a house but doesn't have enough money. At first, he said "My salary is enough," but when he actually calculates, it's not enough, so he needs to get a bank loan. Getting a loan lets him buy the house right away, but he has to pay interest every month and repay the principal later, creating a burden.
It's the same for a country. Issuing foreign currency bonds can raise $20 billion right away, but we'll have to pay interest continuously and repay the principal later. This ultimately increases national debt and can burden fiscal soundness.
The opposition argues, "The president and administration cannot make such a big fiscal commitment alone. They need parliament's consent." This is the Memorandum of Understanding (MOU) ratification controversy. There's a constitutional principle that parliament must approve agreements between countries that significantly affect finances, and they say this Korea-US agreement applies here.
The second issue is the AI budget. The government allocated a whopping 10.1 trillion won for AI-related budget next year. This is a greatly increased amount compared to last year, including various projects like AI semiconductor development, AI data center construction, and AI talent training.
Everyone agrees that AI is the core of future industries. The problem is whether this budget can really be used efficiently. The opposition points out, "There are too many projects, some overlap, and some didn't even go through preliminary feasibility studies."
A preliminary feasibility study (pre-feasibility) is a procedure where the government checks whether a project is really economically valuable and cost-effective before starting a big project. It's like a company reviewing feasibility before making a big investment. But some AI projects received budget allocations without this verification process just because they were "urgent" or "future industries."
Let me give you an example. Company B wants to invest 10 billion won in new product development. Normally, they do market research, calculate profitability, and get reviews from various departments before deciding. But what if they proceed without verification, saying "This is future business, let's just invest first"? The risk of failure or wasting money later increases.
The third issue is local currency. The government allocated 1.15 trillion won to issue local currency for regional economic revitalization. Local currency can only be used in specific areas, at local stores rather than large marts or online shopping malls, with the goal of reviving neighborhood businesses.
But the opposition announced cuts, saying "The effect is not proven, and the fiscal burden is just large." In fact, research results differ on whether local currency really helps the local economy. Some studies report positive effects, but others point out "There's a short-term consumption increase effect, but it's minimal in the long term."
Also, since local currency works by the government providing discount benefits, that much tax money goes in. For example, if they sell 100,000 won worth of local currency for 90,000 won, the government subsidizes 10,000 won. Since these subsidies exceed 1 trillion won, questions arise about "whether there's really an effect worth this much."
Ultimately, the core of this budget controversy comes down to two questions: 'How will we raise the funds?' and 'Can the budget be used efficiently?' Although it's the new government's first budget, the big difference in positions between ruling and opposition parties means agreement won't be easy.
2️⃣ Economic Terms
📕 Foreign Exchange Asset Operation Profits
Foreign exchange asset operation profits are income the Bank of Korea earns from managing foreign exchange reserves.
- The Bank of Korea holds about $420 billion in foreign exchange reserves and invests them in US Treasury bonds, bonds, and deposits to earn interest income.
- When interest rates are high, profits are high, but when rates fall, profits also drop, showing volatility.
- The government said it would use these profits to fund US investment, but there are concerns about whether they can be secured stably every year.
📕 Foreign Currency Bonds
Foreign currency bonds are bonds where the government or companies borrow money from overseas investors and repay principal and interest in foreign currency (mainly dollars).
- It's one way to raise funds overseas when domestic funds are insufficient.
- Issuing foreign currency bonds can secure the needed dollars right away, but there's interest burden and exchange rate risk.
- As the government tries to cover the shortage in US investment funds with foreign currency bonds, fiscal burden controversy has arisen.
📕 Preliminary Feasibility Study
A preliminary feasibility study is a procedure where the government reviews the economic viability and effectiveness of major projects before starting them.
- Projects with total costs over 50 billion won or national financial support over 30 billion won are subject to this.
- It comprehensively evaluates the cost-benefit ratio of projects, regional economic impact, and policy validity.
- Some of the AI budget was allocated with exemptions from preliminary studies, raising transparency and efficiency controversies.
📕 MOU (Memorandum of Understanding) Ratification
An MOU documents cooperative matters between countries. While legally weak in binding power, it has the nature of a political promise.
- MOUs generally don't require parliamentary ratification, but there's an interpretation that constitutional parliamentary consent is needed when fiscal burden is large.
- This Korea-US tariff agreement MOU has a large fiscal burden of $20 billion annually, causing ratification controversy.
- The opposition demands ratification, saying "The administration cannot make important promises involving people's taxes unilaterally."
3️⃣ Principles and Economic Outlook
✅ Reality and Risks of Raising US Investment Funds
To continuously make $20 billion in cash investments, securing stable funding is essential, but current plans have many uncertainties.
First, there's the volatility problem of foreign exchange asset operation profits. The Bank of Korea's foreign exchange operation profits are greatly affected by international interest rate changes. In recent years, as the US Fed maintained high interest rates, foreign exchange operation profits were high, but when rates fall in the future, profits will also inevitably drop. For example, if US interest rates fall from the current 5% to 2%, foreign exchange operation profits will also decrease accordingly. In this situation, concerns arise that it will be difficult to stably secure $20 billion every year. Also, foreign exchange operation profits are originally funds used to increase foreign exchange reserves or stabilize the foreign exchange market during financial crises. If we spend all of this on US investment, crisis response capability could weaken.
Second, there's the burden and risk of issuing foreign currency bonds. If foreign exchange operation profits alone are insufficient, we'll have to issue foreign currency bonds, which increases national debt. Foreign currency bonds must repay principal and interest in dollars, so there's exchange rate risk. If the won-dollar exchange rate rises from the current 1,350 won to 1,500 won, even repaying the same amount requires much more money in won. It can also affect national credit ratings. If foreign currency bond issuance increases, international credit rating agencies may worry about Korea's external debt burden and lower the credit rating. If credit ratings fall, we'll have to pay higher interest when borrowing money in the future.
Third, we must also consider uncertainty in investment returns. The government says it will invest in US Treasury bonds or high-quality corporate bonds, but investment returns are not guaranteed. If US Treasury bond interest rates fall, returns also drop, and in the case of corporate bonds, there's risk of principal loss if companies become troubled. Ultimately, questions remain about whether we can earn appropriate returns while investing $20 billion annually, and whether those returns will actually help our economy.
US investment has political goals of strengthening Korea-US relations and easing trade friction, but careful approach is needed in terms of economic real benefits and fiscal soundness.
✅ Light and Shadow of Surging AI Budget
Fostering the AI industry is essential for securing future competitiveness, but it can only lead to real results if budget execution efficiency and transparency are guaranteed.
First, while the 10 trillion won AI budget is clearly large, there's criticism that projects are scattered. As various ministries each promote AI-related projects, duplicate investment and inefficiency can occur. For example, the Ministry of Science and ICT, Ministry of Trade, Industry and Energy, and Ministry of Education each have AI talent training projects, and if coordination between them doesn't go well, only budget can be wasted. Also, as awareness grows that you can receive budget just by attaching the "AI" name, problems are pointed out where projects not actually related to AI are included. Selection and concentration are needed, but if money is spread across too many projects, effects can actually decrease.
Second, there's the preliminary feasibility study exemption controversy. Some AI projects were promoted without going through preliminary studies for reasons like "urgent" or "strategically important." Of course, speed is important given the rapidly changing nature of the AI industry. But preliminary studies are not just procedures that waste time - they're safety devices that verify project validity to prevent tax waste. Even in the past, there were many cases where projects that didn't go through preliminary studies failed or wasted budgets. The Four Rivers Project and some large civil engineering projects are examples. If AI projects proceed without thorough verification, the same mistakes could be repeated.
Third, role sharing with the private sector is important. AI is basically an area where private companies can do better. Global companies like Google, Microsoft, and Meta are investing tens of trillions of won in AI R&D and innovating at fast speeds. What government should do is basic research that these companies find hard to invest in, infrastructure construction, and regulatory improvement. But looking at the current AI budget, there are too many projects the government is trying to do directly. If government intervenes even in areas where the private sector can do well, inefficiency can actually arise.
While the direction of AI budget expansion is right, real results can only be achieved by keeping principles of selection and concentration, transparent verification, and cooperation with the private sector.
✅ Controversy Over Local Currency Effectiveness
While local currency has the good intention of reviving neighborhood businesses, actual effects and fiscal burden must be coldly evaluated.
First, research results on the actual effects of local currency are mixed. In some areas, reports show small business owners' sales increased after introducing local currency. Because consumers use local currency for discount benefits, and that money goes to local stores, there are positive effects. But other studies point out "Consumption increases in the short term, but effects are minimal in the long term." Because consumers are just switching money they were going to spend anyway to local currency, not actually increasing consumption itself. For example, if Mr. A originally bought 100,000 won worth of groceries at the neighborhood supermarket, and still buys 100,000 won worth after local currency was created, there's actually no real effect.
Second, questions arise about whether effects are sufficient compared to fiscal burden. Since local currency works by the government subsidizing discount benefits, that much tax money goes in. A budget of 1.15 trillion won is not small money. Critics point out that using this money in other ways could be more effective. For example, policies that directly support business consulting for small business owners, help digital transformation, or reduce rent burdens could provide more fundamental help. Local currency can temporarily increase consumption, but has limitations in that it doesn't increase small business owners' fundamental competitiveness.
Third, it doesn't change the competitive structure with large retailers. The fundamental reason neighborhood businesses struggle is that large marts and online shopping malls have overwhelming superiority in price and convenience. Even getting a 10% discount with local currency, if online offers a 20% discount and delivers to your doorstep, consumers will still choose online. Ultimately, local currency is just a temporary treatment, and for small business owners to truly gain competitiveness, more fundamental changes are needed. For example, it's more important long-term for multiple small business owners to cooperate to create a joint delivery system or differentiate with unique products and services.
While local currency has meaning as a short-term stimulus measure, it cannot be a long-term solution, and considering fiscal burden, finding more effective alternatives is necessary.
4️⃣ In Conclusion
Next year's budget review is an important test to gauge the new government's economic policy direction. The three issues of US investment, AI budget, and local currency each symbolically show challenges facing the Korean economy.
The US investment issue is about how much economic cost we must pay for political goals of strengthening the Korea-US alliance and easing trade friction. $20 billion annually is by no means a small amount, and if we cannot stably secure those funds, it can seriously damage fiscal soundness. The government's claim that foreign exchange operation profits alone are sufficient is overly optimistic, and issuing foreign currency bonds involves national debt increases and exchange rate risks. The parliamentary ratification controversy is not just a political fight but an important issue related to the essence of fiscal democracy.
While the AI budget surge clearly has justification for fostering future industries, if efficiency and transparency are not guaranteed in the execution process, it can end in tax waste. Preliminary feasibility study exemptions especially should be careful. We know well how much tax was wasted by projects that didn't go through preliminary studies in the past. Since AI is an area where the private sector can do better, it's desirable for government to focus on basic research, infrastructure construction, and regulatory improvement, and leave the rest to the private sector.
While local currency has the good intention of reviving neighborhood businesses, more careful approach is needed considering effectiveness controversies and fiscal burden. Rather than spending over 1 trillion won on local currency discount subsidies, investing to increase small business owners' fundamental competitiveness would be more helpful long-term.
How should young professionals or finance beginners view this budget controversy? The most important thing is understanding 'where taxes come from and where they go.' We must critically examine whether our taxes are really being used efficiently where needed, or wasted for political purposes or popularity.
A budget is not just a list of numbers. It contains what the government considers important and what future they're trying to create. And that budget is ultimately made from our taxes. Therefore, we have the right and duty to monitor how the government spends taxes, point out what's wrong, and demand better alternatives.
Ultimately, this budget controversy is an opportunity to reconsider fundamental values of fiscal transparency, policy efficiency, and fiscal democracy. Beyond political conflicts, we hope the budget will be formulated and executed in a direction that truly helps the people and economy.
Table of Contents