South Korea’s fiscal policy debate erupted after central bank Governor Rhee Chang-yong’s unprecedented call for a supplementary budget to address economic fallout from President Yoon Suk-yeol’s martial law declaration, intensifying competition between the ruling and opposition parties.

The ongoing debate between the two parties is not only about divergent fiscal strategies but also the broader challenges of stabilizing the economy amid political uncertainty and looming electoral pressures.

BOK Governor Rhee Chang-yong announces the central bank’s decision to cut rates, Oct. 11, 2024 | Image: Bank of Korea

BOK CALLS FOR ACTION

Bank of Korea (BOK) Governor Rhee explicitly called for additional spending of between $10.3 billion and $13.8 billion (15 to 20 trillion won) on Jan. 16. Rhee’s call gained urgency following the central bank’s revised growth forecast on Monday in which the central bank cut its projected growth for 2025 to 1.6 to 1.7% from its earlier 1.9% projection.

Rhee said last week that “the sooner the supplementary budget [is passed], the better,” arguing that delayed fiscal intervention could reduce its effectiveness in countering economic downturn.

Traditionally, the BOK has focused on monetary policy, but Rhee’s remarks mark a significant departure, underscoring the limits of monetary tools in the current environment. This unprecedented intervention puts pressure on both the People Power Party (PPP) and the Democratic Party (DP) to act swiftly.

People Power Party lawmakers, led by Emergency Response Committee Chairman Kwon Young-se and floor leader Kwon Seong-dong, hold placards calling for the withdrawal of Yoon’s impeachment, which they describe as “fraudulent,” Jan. 4, 2025 | Image: People Power Party

RULING PARTY’S CAUTIOUS APPROACH

Rhee’s warning that delays in fiscal intervention could blunt its effectiveness directly challenges the PPP’s cautious approach.

The party has advocated for maximizing the execution of the existing annual budget before considering supplementary measures. Its plan includes front-loading 40% of the 2025 budget in the first quarter — an additional $69 billion — and increasing this to 67% by the first half of the year.

This approach aims to project fiscal prudence, reflecting Yoon’s belt-tightening stance, while addressing economic concerns.

The PPP has also dismissed the DP’s proposal for economic recovery payments through regional currencies as politically motivated and economically unsound, describing it as a means to boost “Lee Jae-myung’s presidential election campaign.”

While the PPP’s strategy allows it to maintain a fiscally conservative stance, its gradual approach may fail to provide timely relief, particularly as political uncertainty lingers.

Democratic Party leader Lee Jae-myung attends a party task force meeting to discuss revitalizing the South Korean stock market at the Korea Exchange, Nov. 28, 2024 | Image: Democratic Party of Korea

OPPOSITION PARTY’S STIMULUS PUSH

Meanwhile, Rhee’s remarks bolster the DP’s push for aggressive stimulus. The party has seized on the BOK’s call for immediate fiscal action, proposing a supplementary budget of at least $21 billion (30 trillion won) and advocating for economic recovery payments of 250,000 won per person through regional vouchers.

Gyeonggi Governor Kim Dong-yeon — also a DP member — has gone further, calling for a “super supplementary budget” of $34.5 billion (50 trillion won) to stimulate the economy before the Lunar New Year holiday next week.

The opposition’s aggressive stance reflects its broader strategy of leveraging fiscal policy to address local economic concerns and challenge the interim administration, as evidenced by its floor leader’s request for meetings with the acting president.

However, this approach is not without risks. The DP’s spending proposal, which far exceeds the number that the BOK recommended, could overstimulate the economy and exacerbate inflation. Further, excessive spending without clear targeting could lead to inefficiencies and fiscal imbalances.

The DP’s focus on regional currencies also spotlights a key political dynamic. Having failed to secure funding for these initiatives in last year’s regular budget process, the party is now using the supplementary budget debate to reignite the issue.

While this strategy may resonate with local constituencies, it will draw criticism from moderates and conservatives for prioritizing political gains over economic fundamentals.

Acting President Choi Sang-mok visits the memorial center for the victims of the Jeju Air plane crash in Muan, Dec. 30, 2024 | Image: ROK Ministry of Economy and Finance

ECONOMIC RISKS AND EXTERNAL PRESSURE

The fiscal debate comes at a time of mounting economic challenges. Recent economic indicators point to significant weaknesses in consumer spending, with December credit card growth decelerating sharply and luxury goods purchases, including imported vehicles, declining. 

South Korea’s housing and construction sectors are struggling, with the apartment purchase sentiment index declining for four consecutive months as of Dec. 2024. The downturn has led to delays or cancellations of new projects, with 27 construction companies filing for bankruptcy between January and November last year — double the previous year’s figure and the highest since 2019.

Apartment sales in 2025 are expected to hit a record low for the past decade, with only 146,000 units projected.

Sector-specific weaknesses highlight the importance of targeted fiscal measures. For example, government spending on construction projects traditionally boosts job creation and economic activity. However, with the sector currently hampered by low demand and market hesitation, such spending may have limited immediate impact.

External risks compound South Korea’s fiscal vulnerabilities. Donald Trump’s return to the U.S. presidency raises concerns about potential trade pressures, including tariffs on South Korean automobile and battery sectors.

These uncertainties make the timing and scale of domestic stimulus even more critical. Premature spending could deplete fiscal resources before external shocks materialize, while delayed intervention might leave the economy vulnerable during a critical transition period.

Democratic Party leader Lee Jae-myung meets with People Power Party floor leader Kwon Seong-dong, Dec. 18, 2024 | Image: Democratic Party of Korea

POLITICAL RISKS AND TIMING

South Korea’s political instability remains a central factor in the fiscal debate. Acting President Choi Sang-mok has indicated a willingness to consider additional fiscal spending this week, marking a significant shift in the government’s stance. By Wednesday morning, the PPP had also begun to reflect Choi’s stance.

Senior PPP officials have suggested that supplementary spending could be discussed after assessing the impact of accelerated budget execution.

However, historical patterns show that four of the past eight supplementary budgets that were passed between 2020 and 2022 — under the Moon and Yoon administrations — occurred within a month of major elections. These decisions likely reflect the major parties’ strategy of leveraging the supplementary budgets to maximize their electoral prospects.

In other cases, supplementary budgets were rarely passed at the start of the year, aside from when there were major economic shocks such as the 1997 Asian Financial Crisis and the COVID-19 pandemic. 

Assuming that the Constitutional Court upholds Yoon’s impeachment, thus confirming an early election, the PPP may then shift its stance to push for a supplementary budget. However, it is unlikely that the court will reach a decision before late spring.

Passing a supplementary budget then could prove too late for optimal economic impact, according to the BOK’s assessment.

The effectiveness of any fiscal intervention depends on its timing and focus. The PPP’s gradual approach risks being overtaken by events if political uncertainties extend into the second quarter. Conversely, the DP’s aggressive push could lead to inefficient allocation of resources if implemented before consumer and business confidence recover.

Moreover, potential U.S. trade barriers under the new Trump administration could compel Seoul to redirect fiscal resources toward supporting the country’s export sector.

An elderly South Korean citizen strolls in the city holding his smartphone, Oct. 3, 2021 | Image: Korea Pro

POLITICS VS PUBLIC GOOD

South Korea’s fiscal policy debate highlights the intersection of economic recovery and political strategy. As the PPP prioritizes cautious budget execution and the DP pushes for aggressive stimulus, the timing and effectiveness of their responses will have far-reaching implications.

With external risks such as U.S. trade pressures looming, the success of these policies will depend not only on their scale but also on their ability to restore consumer and business confidence in a volatile environment.

In the coming months, how these fiscal strategies play out will not only define South Korea’s economic recovery but also influence its global competitiveness.

Edited by John Lee