South Korea announced today (Tuesday) a supplementary budget proposal worth $17.3 billion aimed at supporting consumers and businesses affected by the repercussions of the war in the Middle East, which has led to a sharp increase in global energy prices.
This move comes amid rising oil prices due to the war led by the United States and Israel against Iran, increasing the risks of slowing growth and rising inflation in Asia's fourth-largest economy, which heavily relies on oil imports, with about 70% of its oil coming from the Middle East.
Details of the Emergency Budget
This supplementary budget is the second within less than a year under President Yoon Suk-yeol, who has pledged since taking office in June to pursue an expansionary fiscal policy to boost economic growth. Budget Minister Park Hong-kyu stated, "Beyond economic indicators, the concerns and difficulties faced by citizens and businesses are escalating more than ever, making proactive response an urgent necessity."
The spending plan amounts to approximately 26.2 trillion won (equivalent to $17.3 billion), which includes allocating 10.1 trillion won to address the impacts of rising oil prices, 2.8 trillion won to support low-income earners and youth, and 2.6 trillion won to assist companies affected by the conflict in the Middle East.
Background & Context
The South Korean government aims to allocate 5 trillion won to compensate oil refining companies for losses incurred due to the imposition of price caps on fuel, a measure not implemented for about 30 years. Additionally, 4.8 trillion won will be allocated for direct financial support to citizens through consumer vouchers ranging from 100,000 to 600,000 won per individual, depending on income level and region, with the highest income bracket (30% of the population) excluded.
The Ministry of Finance clarified that the funding for this budget will come from a surplus in tax revenues resulting from a boom in semiconductor exports and a recovery in the stock market, without resorting to issuing new government bonds, while allocating 1 trillion won to pay down part of the national debt.
Impact & Consequences
This package is expected to raise total government spending for 2026 to 752.1 trillion won, an increase of 11.8% compared to last year, contributing to an economic growth boost of about 0.2 percentage points, compared to the previous plan which targeted spending of 727.9 trillion won before the outbreak of the war.
Despite the increase in spending, the government expects the fiscal deficit to decrease to 3.8% of GDP, down from 3.9% in previous estimates and 4.2% last year, while the debt-to-GDP ratio is likely to reach 50.6%, a decrease from previous forecasts.
Regional Significance
In a related context, the Bank of Korea indicated last month that it would not adjust its monetary policy until at least August, while raising its growth forecast for the economy in 2026 to 2.0% from 1.8% previously, after the economy recorded a growth rate of 1.0% in 2025.
Last year, the Yoon administration approved an additional budget of 31.8 trillion won just one month after taking office, which included a major program for distributing financial vouchers to stimulate domestic demand, which had declined following a political crisis that ensued after an attempt to impose martial law in December 2024.