[Editorial] Considering a supplementary budget over the Middle East crisis: election-driven populism must be avoided

A supplementary budget now appears likely as a response to surging oil prices triggered by the war involving the United States of America (U.S.), the State of Israel, and the Islamic Republic of Iran. President Lee Jae-myung of South Korea said at a State Council of South Korea meeting on the 10th, "Additional fiscal resources are needed if we are to support small business owners and marginal firms. In any case, we are in a situation where an early supplementary budget is inevitable." The following day, at a meeting of the Emergency Economic Council, Deputy Prime Minister for Economic Affairs Koo Yun-cheol stated that the government would mobilize every policy tool, including a supplementary budget, to support people’s livelihoods and the broader economy. Taking into account the time needed to prepare the government proposal and pass it in the National Assembly, many expect a "cherry blossom" supplementary budget around April.
The government is moving toward a supplementary budget because fears are mounting over a "triple high" shock, in which prices, the exchange rate, and interest rates all rise simultaneously under the impact of expensive oil. If the Middle East crisis drags on, the economy could slip into stagflation, where high inflation inflicts pain across the economy even as growth remains weak. Hyundai Research Institute has projected that if oil prices climb to around 100 dollars per barrel, the economic growth rate will fall by at least 0.3 percentage points, while the inflation rate will rise by 1.1 percentage points. This heightens the need for policy action that takes such risks into account.
Of course, a supplementary budget should be used only sparingly and only when it meets the conditions set out in the National Finance Act, such as war, large-scale disasters, or severe economic downturns. Even before the Middle East crisis, low-income households and small business owners were already struggling with weak consumption and high prices. If the shock of higher oil prices is added on top of this, vulnerable groups could find themselves in a situation from which it is very hard to recover. Given that a delayed response could easily turn into a belated and ineffective one, a swift supplementary budget is needed. The government should carefully review conditions across all sectors of the economy and move preemptively.
It is a positive sign that current tax revenues are relatively strong. Thanks to robust performance by Information Technology (IT) companies, including record operating profits last year at Samsung Electronics and SK hynix, corporate tax receipts this year are likely to far exceed the original forecast of 86.5 trillion won. If the supplementary budget is set at around 10 trillion won, it could be financed entirely with excess tax revenue, without issuing new government bonds. However, if the size goes beyond that, issuing government bonds will be unavoidable, which could in turn push up market interest rates and create side effects.
The supplementary budget is expected to focus primarily on easing fuel costs for ordinary households. In practice, this will likely involve a combination of a fuel tax cut that applies to the entire population and targeted fuel subsidies limited to vulnerable groups. If the government only cuts the fuel tax, tax regressivity could emerge, with higher-income groups enjoying a larger share of the benefits.
What is worrisome is the possibility that the supplementary budget will be stretched into areas that have little direct connection to the high oil price situation. Some have floated ideas such as support for cultural and artistic professionals, measures to address worsening youth employment, and funding related to the administrative integration of local governments as potential items for the supplementary budget, but it is questionable whether these truly fit the stated rationale. If, ahead of the local elections, the debate once again devolves into controversy over election-driven giveaways, the original purpose of the supplementary budget will inevitably be undermined.
Public finances, the economy’s final safety net, are funded by taxpayers’ money. If supplementary budgets are repeatedly used under the banner of economic management, the principles of fiscal discipline will erode and a kind of "supplementary budget addiction" may take hold. At a time when the national debt burden is already growing, the sustainability of public finances must be scrutinized even more rigorously. The government must not be swayed by populism or political demands; instead, it should thoroughly verify the necessity and effectiveness of each program and direct limited resources only to where they are most needed. Fiscal policy requires clear principles and restraint.