3 Tln Won to Alleviate High Oil Prices

The supplementary budget will reach 4.9 trillion won this year, three trillion won of which will go to ease the burden of high oil prices.

The government’s announcement made yesterday, however, could fuel inflationary pressure. Generally, a supplementary budget comes when economic conditions are unfavorable such as in times of a business slowdown and growing unemployment.

Prime Minister Han Seung-soo held a Cabinet meeting yesterday and decided to issue the supplementary budget from extra tax revenue. The bill will be introduced to the extra session of the National Assembly before the end of this month.

If approved, the extra budget amount will be the largest since 7.5 trillion won in 2003. The decision, however, will not affect the country’s fiscal health since the government will not issue extra treasury bonds.

According to the government’s budget plan, three trillion won of the additional budget will go toward alleviating the effects of soaring oil prices. Most of all, energy subsidies will go to lower-income earners such as welfare recipients as well as freeze gas and electric charges. The supplementary budget will not include oil tax refunds of up to 240,000 won for workers and the self-employed.

The remaining 1.9 trillion won will be spent to encourage the use of public transportation and help the lower-income class. Of the amount, 1.2 trillion won will go to the poor and 700 billion won go to refund mandatory fiscal spending such as fees to finance land for schools.

The Korea Institute of Public Finance said the supplementary budget will help raise economic growth 0.07 percentage points in the second half of this year and 0.08 percentage points next year.

Negative effects are expected, however. The supplementary budget is expected to raise consumer prices 0.01 percentage points in the second half and 0.17 percentage points next year. Apart from the supplementary budget, the three trillion won in oil tax refunds will raise inflation 0.18 percentage points next year. In sum, the supplementary budget and the oil tax refunds will raise consumer inflation 0.35 percentage points next year.

Vice Strategy and Finance Minister Bae Kook-hwan said, “The government initially planned to spend the supplementary budget to create more jobs or boost the economy in April, but changed its initial plan and decided to spend the money to ease the people’s monetary burden due to surging oil prices.”

legman@donga.com