[Gangnam Perspective] What the 'Shortest-Ever War Supplementary Budget' Missed

It has been a week since the government’s 26 trillion won supplementary budget proposal was submitted to the National Assembly of the Republic of Korea. In the meantime, the war between the United States and the Islamic Republic of Iran has taken unexpected and complex turns, and now appears likely to drag on. The shock of high oil prices is intensifying, and disruptions in petrochemical feedstock supplies are causing shortages of a wide range of derivative daily necessities, making conditions on the ground even tougher. This rapid change in circumstances is likely to upend even the priorities built into what has been called the "shortest-ever" war-related supplementary budget.
There are many disappointing aspects in the content of this supplementary budget. To save time, the package was designed in a top-down manner, and there was a lack of reflection and debate based on what is actually happening in the field.
First, cash handouts are becoming routine. The government has earmarked 4.8 trillion won for high oil price relief payments, which will distribute between 100,000 and 600,000 won to 35.77 million people in the bottom 70 percent income bracket. Dining out and service demand will increase, while supplies of related goods become unstable, pushing prices even higher and stoking inflation. Including this package, cash-like support to the general public since the current administration took office amounts to 18 trillion won. The more these cash coupons become institutionalized, the less effective they become. Their impact is highly volatile and short-lived. The Small Business Business Survey Index (BSI) for small merchants, for example, rose to 79.1 last October on the back of consumption coupons, only to fall to 68.1 by February this year, clearly illustrating this pattern.
Second, there is a contradiction with the government’s own policy stance. The plan to distribute 58.6 billion won worth of discount coupons for lodging, vacations, movies, and performances—on top of last year’s second supplementary budget, which provided 7.8 million such coupons with a budget of 77.8 billion won—runs counter to official policy. It creates a policy inconsistency by encouraging more travel by car and higher oil consumption. The government has already raised its crude oil crisis alert to Level 3 (Alert), and has even left open the option of a "one-out-of-five days" driving restriction for private vehicles if conditions worsen. In this context, people will be understandably confused as to whether they are being told to save fuel or to get in their cars and go on trips regardless.
Third, there is the question of urgency and appropriateness. It is doubtful whether support for cultural and artistic professionals and one-off employment or startup events needed to be rushed into a war-related supplementary budget. During COVID-19, this sector was hit hard by distancing measures such as spaced seating in performance venues, but a war supplementary budget is a different matter. It is also questionable whether it is reasonable to insert into this war budget the "Everyone's Startup" program—an event to select 5,000 young entrepreneurs with 155 billion won in funding—that was omitted from this year’s main budget. Likewise, it is hard to be convinced that short-term government job programs such as hiring 9,500 people for the Delinquent Tax Management Unit (213.4 billion won), 5,000 people for a special farmland survey (58.8 billion won), and 3,500 people for work experience in the social solidarity economy (19.5 billion won) are truly urgent measures required by a high oil price crisis.
The apartment balcony mini-PV system program, with a budget of 25 billion won, raises similar concerns. In the past, this project was plagued by low power generation efficiency, a flood of cheap Chinese products, steering contracts toward certain unqualified companies, and subsidy fraud. Before expanding it again, the government should first present measures to correct and supplement these problems.
Even after this war-related supplementary budget is executed, the impact of high oil prices is likely to persist for about a year. According to the Korea Institute for International Economic Policy (KIEP), international oil prices are expected to remain well above pre-war levels—63 dollars per barrel—for a considerable period. This war has struck directly at the crude oil supply chain, and its aftereffects will be far more severe and prolonged than those of the war between the Russian Federation and Ukraine. Markets also expect that the increase in money supply from this cash-heavy supplementary budget will fuel inflation expectations. That, in turn, raises the likelihood of further increases in the government bond yield, which has already climbed because of the war. The annual interest burden on government bonds, which already exceeds 30 trillion won, will grow heavier.
The core of this supplementary budget should be the crisis of high oil prices and disruptions in oil supply chains. The government should have provided broader support to industrial regions and workers hit directly by the shock, to restructuring and innovation projects in affected industrial complexes, and to companies that may have to halt factory operations because they cannot secure Naphtha and other petrochemical feedstocks. It should also have included fast-track support for troubled national projects such as expansion of the electrical grid, and measures to spur infrastructure investment like building additional energy terminals for oil and gas stockpiling. Support is likewise needed to ensure that key national infrastructure projects, whose timelines are being delayed by soaring project costs and raw material prices driven by a weak currency and high inflation, can proceed smoothly. If, as one senior official overseeing the budget put it, this is "a supplementary budget we would not have done if there had been no war," then it should have incorporated these elements in a much more detailed and comprehensive way.
skjung@fnnews.com Reporter