The government approved a 820.9 trillion won ($607 billion) budget for next year at a Cabinet meeting on the 1st, an increase of 93 trillion won, or 12.8%, from this year. Both the size of the increase and its rate are the largest on record, making it an ultra-super budget. President Lee Jae-myung said the same day that "a productive fiscal strategy is needed to expand fiscal capacity by growing the economic pie and advancing industrial capabilities." He meant that tax revenue swelled by the semiconductor boom will be poured aggressively into improving the economy's fundamentals to lift the potential growth rate.
The policy intent — investing in future industries to create a virtuous cycle of growth and rising tax revenue — is understandable. Next year's budget concentrates 21.3 trillion won on three mega-projects and artificial intelligence, and 62.8 trillion won on expanding future growth engines. The problem is that cash handout spending remains, with the basic income program for farming and fishing villages rising to 1.1658 trillion won next year from 304.7 billion won this year. The management of the future response fund is also contentious. The government plans to run 104.4 trillion won of the 162.3 trillion won fund as surplus funds, which means it intends to use a large pool of money like petty cash without going through parliamentary checks.
Above all, it is worrying that national debt will grow by 106 trillion won to 1,519.8 trillion won even as national tax revenue rises by 194.2 trillion won next year. That comes to 29.33 million won per person, up 2 million won from this year. Once national debt starts growing, it tends to snowball. The government says it will manage the ratio of national debt to gross domestic product at the high 40% range by 2030, but that cannot be guaranteed if the semiconductor super cycle ends. Korea should take a lesson from Japan, where the government of Takaichi Sanae recently pursued excessive fiscal expansion to spur growth, only to strain public finances through higher interest costs on government bonds and hurt household and corporate activity.
The government must face the fact that expansionary fiscal policy alone cannot raise the potential growth rate. Fiscal spending will translate into higher growth only if binding fiscal rules are written into law promptly and structural reforms, such as resolving the dual structure of the labor market, are pursued alongside. The National Assembly, too, must strictly screen out the potential for irregular management of the future response fund and pork-barrel projects during budget deliberations. An ultra-super budget must not be left as a bill of debt for future generations.
