(EDITORIAL from Korea Herald on Nov. 25)

Shift in fiscal policy
President Yoon hints at change in focus on fiscal soundness amid worsening economy

The Yoon Suk Yeol administration has focused on maintaining fiscal soundness as a key economic policy. But its policy showed signs of change last week amid growing concerns about the toxic mix of sluggish domestic demand and a continued slowdown in economic growth.

"In the first half of this year, the government has made efforts to revitalize the economy by helping the private sector lead the way," President Yoon said at an event Friday. "In the second half, the government will strive to resolve social polarization to offer people a hope for the future."

Yoon also said that the government will open a "new era for the middle class" by injecting "fresh energy" into people's livelihoods and the economy.

Yoon's comments, which directly mention a shift in economic policy, are now interpreted as a sign that the government may pivot to active fiscal spending and push for drawing up a supplementary budget.

Some experts view Yoon's hint at departing from fiscal soundness as inevitable considering the worsening economic conditions that are feared to undercut the growth prospect of Asia's fourth-biggest economy.

The construction sector, which is an important indicator of economic activity in Korea, has been mired in a protracted slump. Private spending is also sluggish, reflecting consumers' willingness to cut costs at a time when the economy continues to slow. Equally worrisome is the disheartening outlook that the country's exports could stagnate toward the end of the year.

Against this backdrop, both the state-run Korea Development Institute and the International Monetary Fund lowered their 2025 growth outlook for Korea to 2 percent. If external conditions like the risks linked to the new trade policy of US President-elect Donald Trump worsen at a faster pace, even a 2 percent expansion could be a rosy projection.

Fueling speculation about the policy focus from fiscal soundness to stimulus spending is a comment from the presidential office. On Friday, a senior official at the presidential office said that the government is "not ruling out an active role for fiscal spending, including the possibility of a supplementary budget."

But the official said that the government had no plans to draw up an extra budget early next year

Later in the same day, the presidential office told reporters that the government "had not discussed, reviewed or decided on any possibility of an extra budget," adding that the official's comment was "a general explanation that state finance should play a role, if necessary."

As a policy shift would be seen as significant, the Finance Ministry also issued a statement that it is not considering an extra budget proposal for next year.

However, given that the Yoon administration has rejected the extra budget proposal from opposition parties, citing the importance of fiscal soundness, the comment on a supplementary budget from a senior official at the presidential office signals that a change in fiscal policy is one of the possibilities now being considered among high-ranking policymakers.

Maintaining a tight budget is not necessarily an effective policy when multiple factors threaten the overall economy. Expansionary fiscal policy could help prevent the economy from falling into a deeper trap of slump. But critics said holding a discussion about extra budget was premature, if not outright misguided, since the National Assembly is currently reviewing next year's state budget.

Even the ruling People Power Party said that it was "inappropriate to explore possibilities about a supplementary budget at this point."

A bigger question is whether the government has enough room to shift its focus away from fiscal soundness. The government is already expected to see another significant shortfall in tax revenue this year due mainly to weak corporate earnings.

As Yoon said, resolving social polarization is important, but policymakers must weigh all options and issues, including the need for a supplementary budget and ways to remove wasteful state spending programs.
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