Extra Budget for Everyday Life to Counter Surging Oil Prices... Koo Yooncheol: "Excess Tax Revenue Used First, No Deficit Bonds"

The government is considering formulating an extra budget as a countermeasure against the economic shock caused by the Middle East oil price surge. With growing concerns over the prolonged Iran crisis, there is a need for proactive measures to prevent the dual shock of high oil prices and a strong dollar from escalating into a real economy crisis. The plan is to use excess corporate tax revenue, which has exceeded last year's projections, as the funding source for the extra budget if it is formulated. However, there are also concerns that if the war drags on and the country faces stagflation—with rising prices amid stagnation—the extra budget could end up worsening inflation.

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On the 10th, President Lee Jaemyung stated at a Cabinet meeting held at Cheong Wa Dae, "If we are to provide direct support to consumers, we ultimately need to consider an extra budget," adding, "If necessary, please actively review and prepare for an extra budget." He continued, "If the same resources are used, it may be more desirable to target support towards low-income households and vulnerable consumer groups."

The government is reviewing not only comprehensive economic measures in response to the Iran crisis, but also direct support for consumers affected by rising oil prices. The top priorities for review include compensation for losses and fiscal requirements related to the maximum price system, which is scheduled to be implemented this week. Under the Petroleum Business Act, the government can provide fiscal support to compensate business operators for losses resulting from the imposition of maximum price controls. If the government’s general reserve funds allocated for this year are insufficient, it will be unavoidable to provide support through an extra budget. In May 2022, at the onset of the Russia-Ukraine war, the government formulated an extra budget of 55 trillion won, which included measures to expand oil price subsidies for certain vulnerable groups.

The government has met the legal requirements to begin considering the formulation of an extra budget. Article 89 of the National Fiscal Act stipulates that an extra budget may be formulated if there is a significant change or concern of change in domestic or external conditions, such as war, a large-scale disaster, or economic recession. Due to the Iran war, international oil prices have surged close to 120 dollars, and the won-dollar exchange rate has fluctuated near 1,500 won, raising concerns about the deterioration of household economies. This brings the situation closer to meeting the legal requirements for an extra budget. Regarding this, the Ministry of Planning and Budget, which oversees the matter, stated, "The extra budget is an issue to be coordinated with the Presidential Office and related ministries," and expressed its intention to respond flexibly while closely monitoring the Middle East situation.

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It is expected that the primary funding source for the extra budget will be excess corporate tax revenue collected beyond last year's projections. With this year's tax revenue outlook considered favorable, there are predictions that discussions on an extra budget will accelerate toward the end of this month, when the full picture of this year’s corporate tax revenue becomes clearer. Owing to strong performances by semiconductor companies last year, this year’s corporate tax revenue is projected to exceed last year’s estimate (86.5 trillion won) by as much as 7 to 8 trillion won. Taking into account increases in income tax and securities transaction tax revenue, the total additional revenue that can be secured is expected to be around 8 to 9 trillion won.

The key issue is the size of the extra budget. If the extra budget for this year is once again funded from last year’s surplus, the available resources would be relatively small, at a maximum of about 100 billion won. There are also concerns that if the government expands the use of the extra budget beyond support for vulnerable groups affected by oil price hikes—such as designating a maximum price system—and increases the scale to more than 10 trillion won, it will be inevitable to issue deficit-financing government bonds. With inflation concerns causing government bond yields to spike, there are worries that the issuance of deficit-financing bonds to fund the extra budget could further raise government bond yields. If market interest rates, which are linked to government bond yields, rise as a result, it could increase the interest burden on ordinary citizens. The previous day, the yield on the three-year government bond in the Seoul bond market rose to 3.420% per annum, and yields on medium- and short-term bonds with maturities of 1 to 5 years hit new highs for the year.

The government has drawn a clear line, stating that it will not issue deficit-financing government bonds to fund the extra budget. Vice Prime Minister and Minister of Economy and Finance Koo Yooncheol stated at the Cabinet meeting at Cheong Wa Dae, "If necessary, we will actively consider (an extra budget)," adding, "With the semiconductor industry doing well recently and the stock market becoming more active, transaction tax revenue has also increased. Therefore, an extra budget of an appropriate size can be achieved without issuing government bonds."

Some point out that, since the war is still in its early stages, it is premature to discuss an extra budget. Kang Sungjin, a professor of economics at Korea University, stated, "If the war drags on and our economic crisis deepens to a stagflation situation, the extra budget could end up stimulating inflation," adding, "In that case, responding to inflation should take priority over using an extra budget to boost the growth rate."

This content was produced with the assistance of AI translation services.