South Korea unveils $14.6 billion 2nd extra budget to spur growth

South Korea’s new administration on Thursday proposed an additional 20.2 trillion won ($14.6 billion) extra government spending to stimulate domestic demand, just two weeks after pro-spending advocate Lee Jae-myung was sworn in as the country’s president.

The fresh supplementary budget plan, totaling 30.5 trillion won announced by Korea’s Ministry of Economy and Finance, includes 20.2 trillion won of new spending to boost economic growth and 10.3 trillion won to offset an expected shortfall in tax revenue.  

This is the second extra budget of the year since the first supplementary budget of 13.8 trillion won passed in May, but the first one under the Lee government. 

"The economic downturn is so severe that it is time for the government to step in and increase spending," President Lee said at a cabinet meeting, where the Lee administration discussed the new supplementary budget plan.

Lee, who has reiterated that Korea's economic recovery is his government’s top priority, won a snap presidential election on June 3, filling the leadership vacuum left by former President Yoon Suk Yeol impeached for his ill-fated martial law decree in December.

The total spending also aligns with Lee's presidential campaign pledge for an extra budget of at least 30 trillion won to support households and small businesses still reeling from the effects of the pandemic and elevated inflation.

The Bank of Korea last month cut its growth forecast for the country’s economy for this year to 0.8% from the previous 1.5%, citing persistent uncertainty stemming from US tariffs, as it lowered the policy rate for a fourth time in its current easing cycle. It hinted at more rate cuts this year.

Sweeping tariffs imposed by the Trump administration further jolted Asia’s fourth-largest economy, which was already grappling with domestic political turmoil following former President Yoon’s controversial martial law declaration. The combined shocks led to an unexpected contraction in the first quarter.

“The new government has moved with unprecedented speed to introduce an extra budget, aiming to swiftly ease the economic hardship facing our people and small businesses,” Lim Ki-keun, second vice minister of the finance ministry, said when announcing the new stimulus plan.

The government will submit the proposal to parliament, controlled by the left-leaning ruling Democratic Party, on June 23.

BULK OF BUDGET EARMARKED FOR A UNIVERSAL CASH HANDOUT

The largest expenditure, valued at 10.3 trillion won, will be allocated to a universal cash handout program, providing vouchers worth between 150,000 won and 500,000 won to every citizen.

The majority of recipients, approximately 84% of the 51 million eligible individuals, will receive 250,000 won each, while the remainder will receive varying amounts depending on their income level.

The cash handout scheme was one of President Lee’s key campaign pledges, rooted in a similar program he introduced during his tenure as mayor of Seongnam City.

While supporters view it as a tool for economic relief, critics dismiss it as a populist measure with little trickle-down effect on the broader economy.  

Other spending plans include 2.7 trillion won in financial support for the construction sector, including social infrastructure projects, alongside investments in artificial intelligence and support for small and medium-sized enterprises.

The government will also use 400 billion won of the extra spending in debt restructuring for small businesses, including self-employed people, through a so-called bad bank to be set up under Korea Asset Management Corp., the country’s state-owned asset management firm.

Of the total 30.5 trillion won supplementary budget plan, 19.8 trillion won will be financed through additional treasury bond sales, according to the finance ministry.

If the second extra budget passes the National Assembly, Korea’s annual government spending will exceed 700 trillion won for the first time. The original budget for this year was 673.3 trillion won.

The new stimulus plan will raise the country's fiscal deficit to 4.2% of gross domestic product (GDP) this year, up from the previous estimate of 3.3% after the first extra budget.

The government debt is also set to rise to 49.0% of GDP, compared to 48.4% earlier. That also marks an increase of 1.6 percentage points from 2024 levels.

Write to Ik-Hwan Kim and Jeong Min Nam at lovepen@hankyung.com

Sookyung Seo edited this article.