₩20 Trillion “War Supplementary Budget” Plan… Another Pre-Election Cash Handout?

[Choice Times=Jin-An Kim, Former Head of Samsung Electronics’ Middle East & Africa Division]

As the blockade of the Strait of Hormuz shows signs of lasting longer than expected, President Lee Jae-myung appears set to inject more money into the economy in an effort to stimulate growth.

Citing worsening conditions across vulnerable sectors, the president ordered the swift preparation of a so-called “war supplementary budget” to support low-income groups and export-oriented businesses. He also instructed officials to consider significantly expanding support for local regions.

In effect, the government is preparing to release more funds through an additional budget. The size of the package is expected to reach around 20 trillion won. Whether intentional or not, this aligns with widespread expectations that another round of “cash handouts,” such as livelihood support payments, could be distributed ahead of local elections.

Last year, an estimated 10 trillion won in additional tax revenue was collected thanks to a semiconductor supercycle. After years of fiscal strain, government finances finally saw some breathing room. In January alone, national tax revenue reached 52.9 trillion won—6.2 trillion more than the previous year—marking a strong start. If the semiconductor boom continues, an additional 15–20 trillion won in tax revenue could be secured this year.

It appears the administration may be factoring in last year’s surplus and this year’s projected gains to justify a 20 trillion won stimulus package. On the surface, the rationale—spending more to support vulnerable groups amid increased revenue—may seem reasonable.

However, some observers suspect a political motive: with local elections approaching, the government may be aiming to boost support by expanding fiscal spending, potentially dealing a decisive blow to the already struggling opposition. Given the current state of the ruling party’s rivals, such a scenario does not seem implausible.

Yet this entire premise may be flawed. Global conditions are shifting rapidly. The Middle East conflict has driven up oil prices, and signs of stagflation are emerging worldwide. Normally, economic downturns reduce demand and lower prices, while growth increases demand and drives inflation. Stagflation breaks this pattern, combining stagnation with rising prices.

This creates a policy dilemma: raising interest rates to control inflation deepens recession, while lowering rates to stimulate growth fuels further inflation. Falling demand leads to reduced production and higher unemployment, yet rising costs push prices upward.

If surging oil prices trigger stagflation, production at major U.S. tech firms could decline, reducing demand for high-bandwidth memory (HBM) and other semiconductors. In short, the semiconductor supercycle for companies like Samsung Electronics and SK Hynix could come to an end, ushering in a downturn.

In such a scenario, inventories would pile up, prices could collapse to a fraction of current levels, and semiconductor firms would face losses. Rather than increasing tax revenue, the government could confront significant shortfalls relative to its expanded fiscal plans. This would likely lead to increased government bond issuance and a sharp rise in national debt.

The risks are already visible. The yield on 10-year Korean government bonds has risen to around 3.7%, up about 0.25 percentage points since the Middle East conflict began. Rising yields reflect falling bond prices and heightened inflation expectations, placing additional strain on fiscal conditions.

Higher bond yields increase the government’s borrowing costs and push up market interest rates, adding financial pressure on households and businesses. Even before the conflict, excessive bond issuance had already been driving yields upward. Over the past year, 10-year yields have climbed nearly 0.93 percentage points.

Following two supplementary budgets last year, government bond issuance expanded by nearly 30 trillion won beyond initial plans, pushing national debt above 1,300 trillion won as of February. Debt rose sharply from 1,127 trillion won in 2024 to 1,250.6 trillion won in 2025—an increase of over 123 trillion won.

Given this rapid rise in debt and interest burdens, some argue that additional tax revenue from the semiconductor boom should be used to repay debt rather than fund further spending.

Nevertheless, the government appears determined to proceed with a supplementary budget for direct cash support. Deputy Prime Minister and Finance Minister Koo Yun-cheol has stated that no additional bond issuance will be needed, likely based on the assumption that the semiconductor boom will continue.

But if rising oil prices weaken the semiconductor sector—or if stagflation takes hold—such assumptions could quickly unravel.

In ordinary households, borrowing against uncertain future income is widely seen as reckless. Yet governments, perhaps because they are dealing with public funds or driven by political considerations, often act differently—spending in advance based on optimistic forecasts.

If oil shocks bring the semiconductor cycle to an end, Korea could face a surge in national debt and the early stages of fiscal crisis. In the worst case, if the government fails to manage its obligations, it may not default outright but could face a temporary suspension of payments—a moratorium.

Such a scenario would damage the country’s creditworthiness, disrupt external transactions, and potentially force reliance on IMF assistance—raising the specter of a second financial crisis.

For both individuals and nations, excessive debt carries undeniable risks.

#WarSupplementaryBudget #FiscalPolicy #KoreaEconomy