🚨 Supplementary Budget: Formation Procedures, Issues, and Economic Impact

Today Korean Social News | 2025.03.24

📌 Government Faces Bond Issuance 'Dilemma' Amid Supplementary Budget Pressure

💬 Both ruling and opposition parties are demanding the government formulate a supplementary budget by March. However, with tax revenue shortfalls for two consecutive years making funding difficult, the government is considering issuing government bonds. Since deficit bond issuance can increase national debt and interest rates, potentially increasing the burden on citizens, a cautious approach is necessary.

Summary

• A supplementary budget is additional funding allocated during the fiscal year to respond to unexpected situations and serves as an important fiscal policy tool during economic crises or disasters.
• Supplementary budget resources are secured through increased tax revenue, budget savings, fund utilization, or government bond issuance, with bond issuance having side effects of increasing national debt and interest rates.
• Supplementary budget formation must consider the balance between national fiscal soundness and economic stimulation, with transparent procedures and efficient execution being important.

1️⃣ Definition

A supplementary budget is a budget that modifies or adds to the existing budget during the fiscal year to respond to unexpected situations or needs. Simply put, it's an "additional budget" created when the government needs extra spending due to sudden changes in circumstances after setting its annual budget plan.

The supplementary budget (shortened to "supplementary") is used as an important fiscal policy tool to respond quickly to economic crises, natural disasters, and urgent social issues.

💡 Why is this important?

• It serves as a means of fiscal expansion to stimulate the economy during economic downturns.
• It provides resources for recovery and support during disasters or crises.
• It responds to social and economic changes that were unforeseen when the original budget was formulated.

2️⃣ Formation and Execution of Supplementary Budgets

📕 Supplementary Budget Formation Procedures and Requirements

• Supplementary budgets are formed according to specific requirements and procedures. Supplementary budgets are formulated based on the National Finance Act according to the following requirements and procedures. First, formation requirements include war or large-scale disasters, economic recession or mass unemployment, and major changes in the national economy. Article 89 of the National Finance Act stipulates that supplementary budgets can be formulated in such situations. Second, the formation procedure begins with the Ministry of Economy and Finance drafting a supplementary budget based on requests from each ministry. The Ministry reviews and adjusts departmental requests to determine the scale and content of the supplementary budget. Third, the government plan is finalized after deliberation by the State Council and presidential approval. The government submits the finalized supplementary budget to the National Assembly, which is confirmed through deliberation and voting by the Assembly. Fourth, the deliberation period is legally set at 15 days, shorter than the original budget (30 days), considering the urgency of supplementary budgets. Fifth, there is no legal limit on the number of supplementary budgets within a fiscal year, but typically 1-2 are formulated as a convention. Since supplementary budget formation is related to the government's fiscal management credibility, care must be taken not to abuse it.

• There are various methods for securing supplementary budget resources. Resources for supplementary budgets are secured through various methods. First, increased tax revenue can be utilized. When tax revenue exceeds expectations, the excess can be used as a resource for the supplementary budget. This is the most ideal resource procurement method, allowing fiscal input without additional burden. Second, resources can be secured through budget savings. Resources can be used for the supplementary budget by cutting or streamlining existing project budgets. Third, fund surplus can be utilized. Surplus funds from various funds operated by the government can be temporarily utilized. Fourth, procurement through government bond issuance is possible. When tax revenue is insufficient, resources can be secured by issuing government bonds (bonds issued by the state), which is the most controversial method. While government bond issuance allows immediate resource procurement, it can increase national debt and transfer burden to future generations. Fifth, tax rate increases or introduction of new tax items is theoretically possible, but considering tax resistance and economic impact, this is rarely used as a supplementary budget resource.

📕 Execution and Effects of Supplementary Budgets

• Supplementary budget execution has distinct characteristics. Once a supplementary budget is confirmed, it is executed with the following characteristics and processes. First, rapid execution is important. Since supplementary budgets are mostly for responding to urgent situations, executing them as quickly as possible is key to maximizing effectiveness. The government immediately allocates budgets to each ministry and strengthens execution monitoring upon supplementary budget confirmation. Second, there are differences in effect depending on the timing of execution. Generally, supplementary budgets formulated in the first half of the year have a greater impact on that year's economy than those in the second half. Second-half supplementary budgets often have spending that extends into the following year. Third, there are specificities in execution methods. Supplementary budget projects are executed through the same procedures as existing budget projects, but due to the shorter execution period, some procedures may be simplified or prioritized. Fourth, execution management and evaluation are conducted. The Ministry of Economy and Finance regularly checks the supplementary budget execution status and requires improvement measures for underperforming projects. Subsequently, the effectiveness of the supplementary budget is also evaluated. Fifth, the principle of fiscal year independence applies. In principle, supplementary budget funds must be executed within the fiscal year, and unexecuted budgets are carried over to the next year or discarded.

• Supplementary budgets have various impacts on the economy and society. Supplementary budgets bring about the following economic and social effects. First, there is an economic stimulus effect. Supplementary budgets formulated during economic downturns contribute to economic revival through increased government spending and stimulated aggregate demand. Through the multiplier effect, greater economic effects than the fiscal input can be expected. Second, there is a job creation effect. Public job projects or business support can contribute to lowering unemployment rates and creating jobs. Third, there is a support effect for specific industries and classes. Selectively supporting industries or vulnerable groups affected in crisis situations can minimize damage and promote recovery. Fourth, psychological effects are also important. The government's active response can contribute to the confidence and psychological stability of economic actors, leading to revitalized consumption and investment. Fifth, there is an impact on fiscal soundness. Particularly, supplementary budgets through government bond issuance can increase national debt and act as a long-term fiscal burden. It is important to determine the appropriate scale and content of the supplementary budget by comprehensively considering these various effects.

Supplementary Budget Cases and Effects

1. COVID-19 Response Supplementary Budget (2020-2021): Formulated multiple times at the largest scale in history, used for disaster relief funds, small business support, and quarantine budget
   • Effect: Mitigation of economic shock from COVID-19, protection of vulnerable groups
   • Side effect: Rapid increase in national debt, deterioration of fiscal soundness
2. Economic Crisis Response Supplementary Budget (1998, 2008): Large-scale supplementary budgets during the IMF foreign exchange crisis and global financial crisis
   • Effect: Prevention of economic recession, stabilization of financial markets
   • Characteristic: Created foundation for overcoming crisis in parallel with restructuring
3. Disaster Recovery Supplementary Budget: Supplementary budgets for recovery from natural disasters like earthquakes, typhoons, floods
   • Effect: Rapid damage recovery, regional economic recovery
   • Characteristic: Supplementary budget formation proportional to disaster scale, emphasis on rapid execution
4. Job Creation Supplementary Budget: Job supplementary budgets during employment crisis situations like youth unemployment
   • Effect: Short-term employment expansion, support for employment-vulnerable groups
   • Characteristic: Parallel support for public jobs and private job creation
5. Supplementary Budget Under Discussion in 2025: Considering supplementary budget through government bond issuance in a tax revenue shortfall situation
   • Challenge: Seeking balance between national debt increase and economic stimulus effect
   • Issue: Resource procurement method, appropriate scale, selection of support targets

3️⃣ Issues and Current Matters of Supplementary Budgets

✅ Government Bond Issuance and Fiscal Soundness Issues

• Government bond issuance is a major resource for supplementary budgets but has several problems. Securing supplementary budget resources through government bond issuance has the following characteristics and problems. First, there are concepts and types of government bonds. Government bonds are bonds issued by the state to raise funds, and are classified according to purpose as deficit bonds (for compensating fiscal deficit), refinancing bonds (for repaying maturing government bonds), and Foreign Exchange Stabilization Fund bonds (for stabilizing the foreign exchange market). Deficit bonds are mainly issued as supplementary budget resources. Second, there is the problem of national debt increase. Government bond issuance directly increases national debt, raising the debt-to-GDP ratio. This can threaten the long-term sustainability of finance and affect the national credit rating. Third, there is the problem of increasing interest burden. Government bond issuance comes with the burden of repaying principal and interest in the future. As the government bond scale increases, the annual interest cost increases, raising fiscal rigidity. Fourth, there is an impact on market interest rates. Large-scale government bond issuance increases market fund demand, acting as pressure for interest rate increases. This can lead to increased household loan rates and corporate funding costs, burdening the overall economy. Fifth, there is the problem of intergenerational burden transfer. Government bonds raise resources for current generation use through future generation burden, potentially causing intergenerational equity issues.

• Various approaches are needed for fiscal soundness management. Measures for maintaining fiscal soundness when formulating supplementary budgets through government bond issuance are as follows. First, setting and adhering to fiscal rules is important. Setting clear limits on debt-to-GDP ratio, fiscal balance, etc., and adhering to them is the basis of fiscal soundness management. Second, expenditure efficiency and restructuring are necessary. Efforts to reduce unnecessary spending and increase existing budget efficiency should be parallel when formulating supplementary budgets. Third, expenditure composition considering fiscal multiplier effects is important. Even with the same scale of fiscal input, concentration on areas with large economic spillover effects is necessary for efficiency. Fourth, distinction between temporary and permanent expenditures is necessary. Supplementary budgets should be composed of one-time, temporary expenditures to secure fiscal sustainability. Fifth, linkage with mid-to-long-term fiscal plans is important. Supplementary budgets should harmonize with the state's mid-to-long-term fiscal plans, taking care not to undermine long-term fiscal management direction due to short-term needs. It is important to maintain balance between economic stimulation and fiscal soundness by comprehensively considering these measures.

✅ Current Issues and Matters of the 2025 Supplementary Budget

• There are several factors in the background of the 2025 supplementary budget discussion. The background and situation of the 2025 supplementary budget discussion mentioned in the news are as follows. First, there is the problem of tax revenue shortfall for two consecutive years. With continuing lower-than-expected tax revenue due to economic recession and real estate market slowdown, securing additional resources is difficult. Second, the need for economic stimulus is being raised. Amid complex economic difficulties like high interest rates, high prices, and high exchange rates, demands for fiscal expansion for economic revival are growing. Third, political pressure is increasing. Both ruling and opposition parties are pressuring the government by demanding supplementary budget formation for economic recovery and livelihood support. Fourth, concerns about fiscal soundness are growing. There are also voices of concern about additional government bond issuance in a situation where national debt has already significantly increased. Fifth, there are changes in international conditions. External conditions like global interest rate policy changes and international economic situations also affect supplementary budget decisions. Amid these complex situations, the government faces a dilemma between the need for supplementary budget formation and fiscal soundness.

• There are several issues with the 2025 supplementary budget. The main issues surrounding the 2025 supplementary budget formation are as follows. First, there is the issue of appropriate supplementary budget scale. Opinions differ on what scale of supplementary budget is appropriate considering fiscal capacity and economic situation. Second, there is the problem of resource procurement method. Discussion is needed on whether there are alternatives to government bond issuance in a tax revenue shortage situation, or if government bond issuance is inevitable, what its scale and method should be. Third, there is the issue of support targets and priorities. Policy judgment on which areas and classes to prioritize support with limited resources is important. Fourth, there is the issue of supplementary budget urgency and timing. There is discussion on whether supplementary budget formation is needed by March, or if it's better to decide after observing the economic situation further. Fifth, there is the issue of supplementary budget effectiveness. Analysis is needed on whether fiscal input through supplementary budgets will actually be effective for economic recovery and livelihood stabilization, or just have temporary effects. A balanced policy decision must be made by comprehensively considering these issues.

✅ Measures for Efficient Utilization of Supplementary Budgets

• There are several ways to increase the effectiveness of supplementary budgets. To maximize the economic effect of supplementary budgets, the following measures should be considered. First, concentration on areas with high expenditure multiplier effects is necessary. Since not all fiscal expenditures have the same economic spillover effect, resources need to be concentrated in areas with high multiplier effects such as SOC (social overhead capital) investment, R&D, and vulnerable group support. Second, rapid execution is important. Since supplementary budget effects occur at the actual spending point, rapid execution should be promoted by simplifying administrative procedures and removing execution obstacles. Third, design should be in a direction that induces private investment and consumption. Greater effects can be achieved by promoting private economic activity through government spending rather than the spending itself. Fourth, balance between temporary measures and structural reform is necessary. Structural reform elements that strengthen long-term growth engines should be considered along with short-term responses. Fifth, regional balance and class equity should be considered. The supplementary budget should be designed so that its effects are not concentrated in specific regions or classes but distributed in a balanced way. It is important to achieve maximum economic and social effects with limited resources by comprehensively applying these measures.

• Securing transparency and accountability of supplementary budgets is also important. The following transparency and accountability measures are necessary for efficient utilization of supplementary budgets. First, setting clear formation purposes and criteria is important. The fairness of resource allocation should be secured through clear policy objectives and targets for the supplementary budget, and objective selection criteria. Second, transparent disclosure of the supplementary budget process is necessary. Public understanding and trust should be increased by transparently disclosing information about the supplementary budget formation process, resource procurement method, and budget allocation by project. Third, strengthening monitoring of the execution process is important. Execution efficiency should be increased through real-time execution status checks, cause analysis and countermeasure preparation for underperforming projects. Fourth, performance evaluation and post-verification are necessary. The achievement of supplementary budget project objectives, economic and social effects, etc., should be objectively evaluated and the results disclosed. Fifth, strengthening the monitoring functions of the National Assembly and civil society is important. Checks and balances should be maintained by strengthening the National Assembly's budget deliberation and audit functions, and activating civil society monitoring. These transparency and accountability securing efforts will contribute to building public trust in finance while increasing the efficiency and legitimacy of supplementary budgets.

4️⃣ Related Terminology

🔎 Tax Revenue Shortfall

• Tax revenue shortfall means a situation where actual tax income is less than expected.
• Tax revenue shortfall refers to a situation where the tax revenue actually collected is less than what the government expected when formulating the budget. Major causes of tax revenue shortfall include, first, decrease in income and consumption due to economic recession. Deterioration of corporate performance, employment decrease, and consumption contraction lead to decreased revenue from major tax items such as corporate tax, income tax, and value-added tax. Second, real estate market recession can cause tax revenue shortfall. Decreased real estate transactions lead to decreased real estate-related tax revenue such as acquisition tax and capital gains tax. Third, there is the impact of tax policy changes. Policy changes like tax rate reduction, expansion of deductions, increase in non-taxation and reduction can bring greater-than-expected decrease in tax revenue. Fourth, prediction errors or overestimation can be causes. There are also cases of overestimating tax revenue by optimistically predicting economic situations or tax revenue impact. Tax revenue shortfall causes various problems in government fiscal management. Budget execution can be disrupted, national debt can increase, and fiscal soundness can deteriorate. It also becomes a factor raising pressure for finding additional tax sources or necessity for expenditure restructuring. In case of continued tax revenue shortfall, revision of mid-to-long-term fiscal plans and reconsideration of fiscal management strategy become inevitable.

🔎 Deficit Bonds

• Deficit bonds are government bonds issued to compensate for fiscal deficit.
• Deficit bonds are state bonds issued to compensate for fiscal deficit occurring when government expenditure exceeds revenue. As a type of government bond, they have different purposes from refinancing bonds for extending existing government bond maturities or Foreign Exchange Stabilization Fund bonds for foreign exchange market stability. Major characteristics of deficit bonds include, first, their purpose of issuance being compensation for revenue shortfall. They are issued to cover shortfalls when tax revenue shortfall or additional fiscal needs occur. Second, they directly affect national debt. Deficit bond issuance directly increases national debt, raising the debt-to-GDP ratio. Third, they are closely related to fiscal deficit. The larger the fiscal deficit scale, the greater the need for deficit bond issuance, which becomes an important indicator of fiscal soundness. Fourth, they transfer burden to future generations. The principal and interest of bonds issued for current generation spending must be paid by future generations through taxes, raising intergenerational equity issues. Fifth, they affect market interest rates. Large-scale deficit bond issuance can act as pressure for market interest rate increases by increasing fund demand. While deficit bonds are an important fiscal policy tool during economic downturns, excessive issuance can threaten fiscal sustainability, requiring a cautious approach.

🔎 Debt-to-GDP Ratio

• The debt-to-GDP ratio is the ratio of national debt to GDP, an indicator of fiscal soundness.
• The debt-to-GDP ratio is an indicator showing the ratio of national debt to a country's Gross Domestic Product (GDP), a key indicator for evaluating fiscal soundness. It measures the relative burden compared to economic scale rather than simply the debt scale, making it useful for international comparison or time-series analysis. Major characteristics of the debt-to-GDP ratio include, first, its calculation method being 'national debt÷GDP×100(%)'. For example, if GDP is 2,000 trillion won and national debt is 1,000 trillion won, the debt-to-GDP ratio is 50%. Second, it becomes a standard for international comparison. International organizations like OECD and IMF compare and evaluate each country's fiscal soundness based on the debt-to-GDP ratio. Third, there is discussion about the appropriate level. While the EU suggests 60% as a standard in the Stability and Growth Pact, the appropriate level can vary depending on each country's economic structure, growth potential, population structure, etc. Fourth, it affects the national credit rating. The debt-to-GDP ratio acts as an important factor in international credit rating agencies' evaluation of national credit ratings. Fifth, trends and manageability are important. The increase speed, future outlook, manageability, etc., are comprehensively evaluated as more important than simple figures. In Korea's case, while the level is lower than the OECD average, the fast increase speed and future burden due to aging are pointed out as concerns.

5️⃣ Frequently Asked Questions (FAQ)

Q: What are the differences between supplementary budgets and the original budget?

A: Supplementary budgets and the original budget differ in several aspects. First, they have different formation times. The original budget is a regular budget formulated before the start of the fiscal year, submitted to the National Assembly in September each year and confirmed in December. Conversely, supplementary budgets are formulated periodically during the fiscal year as needed. Second, they have different purposes and characteristics. The original budget is a comprehensive plan for state affairs for a year, the basic fiscal plan for all government activities. Supplementary budgets are complementary budgets for responding to situations or urgent needs unforeseen when formulating the original budget. Third, they differ in scale and comprehensiveness. The original budget is large-scale, encompassing all state expenditures, while supplementary budgets are often partial budgets concentrated on specific purposes or areas. Fourth, they have different deliberation periods. The National Assembly's deliberation period for the original budget is legally 30 days, while for supplementary budgets it's 15 days, considering the urgency of supplementary budgets. Fifth, they have different resource procurement methods. The original budget comprehensively utilizes various resources like taxes, non-tax revenue, funds, etc., while supplementary budgets are formulated centering on additional resources like excess tax revenue, budget savings, government bond issuance, etc. Due to these differences, the original budget constitutes the basic framework of national finance, while supplementary budgets play a complementary role enabling flexible response within that framework.

Q: How is the economic impact of supplementary budgets measured?

A: The economic impact of supplementary budgets can be measured in various ways. First, fiscal multiplier effect analysis is the most basic method. The fiscal multiplier, which numerically shows the impact on GDP of a one-unit increase in government spending, is used to estimate the GDP increase effect by multiplying it by the supplementary budget scale. Multipliers differ by project type, with SOC investment, low-income support, etc., generally having relatively high multipliers. Second, macroeconomic model simulation is utilized. Institutions like the Bank of Korea and KDI analyze the comprehensive impact of supplementary budgets on growth rate, prices, employment, etc., through complex macroeconomic models. Third, industrial linkage analysis measures industry-specific spillover effects. The impact on the entire economy is estimated by analyzing the chain effects of expenditure on specific industries on other industries. Fourth, there is job creation effect analysis. The impact on the labor market is evaluated by estimating the scale of direct and indirect job creation according to supplementary budget expenditure. Fifth, actual effect verification through post-evaluation is important. The effectiveness of supplementary budgets is evaluated by analyzing actual economic indicator changes, goal achievement, etc., after supplementary budget execution and comparing with initial expectations. It is important to evaluate the effectiveness of supplementary budgets and reflect in future policy decisions through such analysis. However, there is a limitation in accurately separating the impacts of supplementary budgets and other economic factors, so it is desirable to comprehensively utilize various methodologies.

Q: When and in what situation was the largest-scale supplementary budget in history formulated?

A: The largest-scale supplementary budgets in history were the series of supplementary budgets formulated in 2020 for COVID-19 response. In 2020, a total of four supplementary budgets were formulated, with their cumulative scale reaching about 67 trillion won. This was the largest scale based on a single year, and the highest level in ratio to the original budget. First, the first supplementary budget of 2020 (11.7 trillion won) was formulated in March for initial response to COVID-19, quarantine, and damage support. Second, the second supplementary budget (12.2 trillion won) was formulated in April for providing disaster relief funds to all citizens. Third, the third supplementary budget (35.1 trillion won) was formulated in July for economic stimulus and job creation, starting the Korean New Deal project, and was the largest single supplementary budget in history. Fourth, the fourth supplementary budget (7.8 trillion won) was additionally formulated in September for small business support and strengthening quarantine. The background of these large-scale supplementary budgets was the unprecedented economic and social shock caused by COVID-19. Active fiscal input was needed in a complex crisis situation with factors like sharp drop in economic growth rate, rising unemployment rate, and damage to small businesses and self-employed. It was also a period when many countries globally were implementing large-scale fiscal expansion policies. The large-scale supplementary budgets of this period are evaluated as having contributed to mitigating economic shock, but also left the burden of rapid increase in national debt.

Q: How can citizens express opinions on the formation and execution process of supplementary budgets?

A: There are various ways for citizens to express opinions on supplementary budgets. First, participation in the government's budget formation process is possible. The Ministry of Economy and Finance gathers opinions on budgets through the 'Open Fiscal' website or the National Participatory Budgeting System. Opinions can be expressed through these channels for supplementary budget formation as well. Second, opinion expression in the National Assembly deliberation process is possible. The National Assembly's Special Committee on Budget and Accounts gathers citizen opinions through public hearings, petitions, etc. Particularly, requesting budget reflection for regional issues through local constituency Assembly members can be effective. Third, there are activities through civil society or interest groups. Civil society organizations like the Citizens' Coalition for Economic Justice and People's Solidarity for Participatory Democracy conduct budget monitoring and policy proposal activities, and collective opinions can be expressed by participating in such organizations. Fourth, participation in public opinion formation through media and social media is possible. Influence can be exerted on public opinion formation related to supplementary budgets through writing contributions, SNS activities, participation in online discussions, etc. Fifth, opinion delivery through local governments is possible. For regional issues, opinions can be expressed to the relevant local government, which can reflect them when requesting budget from the central government. Sixth, participation in monitoring and evaluation after budget execution is possible. Contribution to monitoring and evaluating budget execution is possible through reporting budget waste cases, requesting information disclosure, requesting resident audits, etc. Through these various participation methods, citizens can influence the priority setting and efficient execution of supplementary budgets.