KDI: “No need for a supplementary budget for stimulus… raising this year’s growth forecast from 1.8% to 1.9%”

Semiconductor exports buoyed by AI investment boom

Assessment: “Policy rate at current level is appropriate”

The Korea Development Institute (KDI), a state-run research institute, said in connection with the recently resurfaced so-called “cherry blossom supplementary budget” debate that “there is no need for an extra budget for economic stimulus.” The comment came as it revised up its outlook for South Korea’s economic growth this year to 1.9%.

In its “Revised Economic Outlook” released on the 11th, KDI raised its growth forecast for this year by 0.1% point from the projection it published in November last year (1.8%). KDI’s forecast is higher than the Bank of Korea’s (1.8%) but lower than those of the Organisation for Economic Co-operation and Development (OECD·2.1%) and the government (2%). It matches the International Monetary Fund’s (IMF·1.9%).

Jeong Gyucheol, head of KDI’s Economic Outlook Department, said, “As artificial intelligence (AI) investment increases, the semiconductor cycle is performing strongly,” adding, “Improving semiconductor conditions will have a positive impact on exports and will lead to growth in facility investment and consumption.”

KDI made clear that, in light of this growth trajectory, compiling a supplementary budget is not desirable. Jeong said, “If the recent improvement in economic conditions continues as expected, there is no need for a supplementary budget for stimulus.”

The “cherry blossom supplementary budget” theory gained traction as President Lee Jae-myung mentioned a supplementary budget at least three times this year alone. At a Cabinet meeting on the 27th of last month, the president also said, “Isn’t it possible that we may not rule out compiling a supplementary budget this year?” In the bond market, speculation emerged that a supplementary budget worth 10 trillion to 20 trillion won could be put together between March and May.

However, officials at the fiscal authorities drew a line, saying, “There is absolutely no plan for a supplementary budget.” They judged that current economic conditions do not meet the requirements for a supplementary budget under the National Finance Act. The act stipulates that supplementary budgets may be compiled in cases such as war or large-scale disasters,重大 changes in domestic and external conditions (economic downturn, mass unemployment, changes in inter-Korean relations, etc.), or when expenditures the state must pay arise or increase.

Meanwhile, Jeong said of the Bank of Korea’s policy rate (2.5% per year), “There appears to be neither a need to restrain the economy via rates nor an incentive to stimulate it,” adding, “The policy rate at the current level is appropriate.”

Reporters Kim Ik-hwan/Nam Jeong-min lovepen@hankyung.com