'War Supplementary Budget' Balloons to 25 Trillion Won Amid Surging National Debt

The government and ruling party have signaled a fast-track push for a "war supplementary budget" that has ballooned to 25 trillion won ($18.5 billion). The Democratic Party of Korea and the government-presidential office held a senior party-government consultation on the 22nd and agreed to swiftly pass the supplementary budget at the National Assembly plenary session on April 10. The budget aims to address high oil prices stemming from the Iran war, support vulnerable groups, and aid affected businesses. The scale far exceeds the initially projected 10 trillion to 20 trillion won range. At the meeting, Prime Minister Kim Min-seok stressed the need for speed, saying, "The timing is everything for a breakwater supplementary budget to defend livelihoods and stabilize the economy." Democratic Party leader Jeong Cheong-rae responded, "We will pass the supplementary budget at the fastest pace in history."

Erecting a fiscal shield is unavoidable to ward off economic shocks triggered by war. Yet amid rapidly mounting national debt, assembling a "super supplementary budget" risks producing side effects that outweigh the benefits. The ruling party and government claim the budget will be funded by excess tax revenue without additional government bond issuance, but the fiscal reality of annual deficits exceeding 100 trillion won cannot be ignored. Moreover, according to the Bank for International Settlements (BIS), Korea's government debt surged 9.8% in a single year, pushing total national debt past 6,500 trillion won as of the end of the third quarter last year. The government debt-to-GDP ratio rose to 48.6% at the end of last year, up 5 percentage points from a year earlier. With the trajectory of the Middle East situation uncertain, exhausting fiscal ammunition in one shot is also concerning. If the war drags on, tax revenues could decline and additional supplementary budget needs could emerge, potentially forcing the government into deficit bond issuance. There are also significant concerns that releasing a massive supplementary budget could further stoke already surging exchange rates and inflation.

Fiscal policy is the last bulwark protecting the national economy, but it is not a "master key" that can fix everything. Yet Park Hong-geun, the nominee for Minister of the Office of Budget, who would become the nation's chief fiscal steward, emphasized only the need for a supplementary budget over fiscal soundness at his confirmation hearing, arguing that "youth employment and job creation programs should also be included in the supplementary budget." With the June 3 local elections approaching, the government must avoid unnecessary suspicion of populist handouts. The supplementary budget should be limited to targeted support for vulnerable groups and affected businesses, minimizing its scale, while carefully calibrated monetary and fiscal policies should be designed to navigate the headwinds of high inflation and a weak won. We hope that Bank of Korea governor nominee Shin Hyun-song, named by President Lee Jae-myung, along with nominee Park and Deputy Prime Minister and Minister of Finance and Economy Koo Yoon-cheol, will devise the optimal policy mix to achieve both livelihood stability and fiscal soundness.