[Insight & Opinion] Will All Excess Tax Revenue Be Spent Through the Supplementary Budget?

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The government began distributing high oil price relief funds on April 27. Compared to the precedent set under the Moon Jae-in administration, in which the first round of COVID-19 relief funds was distributed four months after the outbreak in May 2020, the Lee Jaemyung administration is being praised for its swift action, as the decision on this high oil price relief fund was made just two months after the outbreak of the US-Iran war.

It is likely that no other government in the world has provided such rapid financial support to its citizens for damages caused by the Iran war as quickly as Korea. However, there are some issues: this relief fund is being financed by surplus tax revenue, and there are also discussions about a possible second supplementary budget.

The government used the 26.2 trillion won supplementary budget drawn up in March, based on an anticipated surplus tax revenue of about 27 trillion won this year due to the semiconductor 'super cycle,' to fund the relief payments. Some forecasts even suggest that the surplus tax revenue from this year's semiconductor super cycle could reach as much as 70 trillion won, far exceeding the government's initial estimate of 27 trillion won.

There are four possible ways to utilize the surplus tax revenue. First, high oil price relief funds; second, repayment of government bonds and settlement of grants; third, funding for polarization countermeasures and industrial restructuring; and fourth, expanding support for research and development.

Among these four options, using the funds for high oil price relief is both a violation of fiscal discipline and considered the least economically productive choice. Moreover, given the timing ahead of local elections, it cannot be denied that this choice by the current administration could be interpreted as a politically motivated decision.

Repaying government bonds and settling grants is most consistent with fiscal discipline, as Article 90 of the National Finance Act stipulates that at least 30% of the fiscal surplus must be used for debt reduction, such as repaying principal and interest on government bonds. However, this option also has the drawback of low economic productivity. Meanwhile, using the funds for addressing polarization and industrial restructuring has lower fiscal discipline compliance, but it is a valid approach as it tackles crucial national challenges that the government has previously neglected, and it is essential for raising the potential growth rate. Finally, expanding research and development support is also worth considering, as it could enable a major leap in science and technology amid the rapidly progressing artificial intelligence (AI) industrial revolution.

The most critical constraint is that both the economically active population and the number of employed people are projected to peak in 2027 and then decline, inevitably causing a fall in the potential growth rate. According to the '2025-2029 National Fiscal Management Plan' submitted by the government to the National Assembly in September last year, national debt is expected to rise by a staggering 404 trillion won over four years, from 1,304 trillion won in 2025 to 1,789 trillion won in 2029. As a result, the debt-to-GDP ratio is projected to soar from 49% in 2025 to 58% in 2029. The International Monetary Fund (IMF)'s Fiscal Monitor Report also highlighted the seriousness of the situation, projecting that Korea's general government debt-to-GDP (D2) ratio would rise from 56.7% this year to 60.9% in 2028 and 64.3% in 2030.

There are also concerns that the US data center investment boom, which is driving the semiconductor super cycle, could cool down starting in 2028, leading to a slowdown in the US economy, and consequently, a global economic downturn beginning in 2028 or 2029. This projection suggests that Korea's economic and fiscal conditions could deteriorate toward the end of the current administration, and thus warrants attention.

Given these projections, the use of surplus tax revenue for the high oil price relief fund should be limited to this first supplementary budget. Thereafter, the highest priority should be repayment of government bonds and settlement of grants, followed by funding for polarization countermeasures and restructuring, and then gradual expansion of research and development support.

Kim Dongwon, former visiting professor at Korea University

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