The first supplementary budget used 25 trillion won in excess tax revenue, allowing spending to expand without issuing new bonds. Of that, 1 trillion won was allocated to repay government debt.
A second supplementary budget would be different. With limited room in tax revenue, much of the funding under discussion would have to come from issuing deficit bonds.
Because bond yields typically move inversely to bond prices, a larger supply of government bonds can push prices down and yields up. With U.S. Treasury yields already elevated, a rise in domestic deficit-bond issuance could further jolt South Korea’s bond-market rates, which some analysts say are already near a threshold.
Analysts warn of a potential vicious cycle: If fiscal expansion aimed at supporting growth also drives market rates higher, the economy could slow, increasing the burden on public finances.
The Korea Capital Market Institute said an increase in government bond supply driven by expansionary fiscal policy is a main factor weakening the market’s capacity to absorb issuance and increasing rate volatility. Government bond yields affect funding costs across the economy and play a major role in pricing risk assets such as stocks and real estate. A sharp rise in rates could spill over into the real economy and financial markets, including wider corporate-bond credit spreads and higher household loan rates at banks, it said.
A Korea Development Institute study found that for every 1 trillion won increase in Treasury bond issuance, the Treasury yield rises by 0.025 to 0.029 percentage points. It also found that for every 10% increase in government debt, bond yields rise by 0.43 percentage points.
Whether rates rise further is expected to depend on how the Middle East war develops and whether a second supplementary budget is pursued. If the situation in which international oil prices do not fall below $100 a barrel persists, the government is more likely to press ahead with a second extra budget to support the economy.
In that process, analysts say coordination between fiscal authorities and the Bank of Korea will be needed to avoid stoking rates. If the roles of fiscal and monetary policy fall out of balance, the costs could be borne most heavily by vulnerable groups.
Experts say policymakers should be cautious about a second supplementary budget to avoid fueling interest rates. They also urge the government to craft policies based on longer-term economic prospects rather than focusing only on short-term relief.
Yeom Myeong-bae, a professor of economics at Chungnam National University, said government policy consists of fiscal policy that spends money and financial policy that manages the money supply.
“If the two are out of sync, the damage will be greater for vulnerable groups,” Yeom said. “When fiscal spending is financed with debt, in the short term the current generation suffers through things like higher prices, and it also creates debt that future generations must repay. Policy should be run with a long-term perspective.”
* This article has been translated by AI.
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