South Korea proposes $22 billion extra budget to mitigate Middle East shock

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SEOUL – South Korea proposed a supplementary government budget of 26.2 trillion won (S$22 billion) on March 31 to support consumers and companies hit by the war in the Middle East.

A surge in oil prices sparked by the US-Israeli war on Iran has raised growth and inflation risks for Asia’s fourth-largest economy, which is also the world’s fourth-largest importer of oil, with 70 per cent of its purchases coming from the Middle East.

It is the second extra budget in less than a year under the administration of South Korean President Lee Jae Myung, who has pledged to pursue an expansionary fiscal policy to spur economic growth since taking office in June 2025.

“Beyond economic data, difficulties and anxiety felt by our people and companies are deepening more than ever,” said Budget Minister Park Hong-keun. “A pre-emptive response is more important than anything else.”

The spending plan of 26.2 trillion won includes 10.1 trillion won for measures responding to high oil prices, 2.8 trillion won for supporting low-income earners and young people, and 2.6 trillion won for companies affected by the Middle East conflict, according to the Budget Ministry.

Among major measures, the government plans to spend five trillion won to make up for oil refiners’ losses incurred by nationwide price caps introduced in March for the first time in nearly 30 years.

It will also allocate 4.8 trillion won to provide financial support in the form of consumer vouchers worth 100,000 won to 600,000 won per person depending on income and region, excluding those in the top 30 per cent nationwide by income.

For the extra budget, the ministry said it would utilise excess tax revenue from a boom in chip exports and a stock market rally, without issuing any treasury bonds. The spending plan also includes treasury bond repayment of one trillion won.

The extra budget will raise total government spending for 2026 to 752.1 trillion won, up 11.8 per cent from 2025, boosting economic growth by 0.2 percentage points. Before the war erupted, the government planned to spend 727.9 trillion won.

Still, 2026’s fiscal deficit will narrow to 3.8 per cent of gross domestic product (GDP), down from 3.9 per cent previously estimated and 4.2 per cent in 2025, the ministry said.

The debt-to-GDP ratio is estimated at 50.6 per cent, compared with 51.6 per cent seen earlier and 49.1 per cent in 2025.

In February – just days before the US and Israel launched their attacks on Iran on Feb 28 – the Bank of Korea signalled it would not adjust monetary policy at least until August.

It also raised its 2026 growth forecast to 2 per cent from 1.8 per cent. In 2025, the economy grew 1 per cent.

In 2025, Mr Lee’s administration drafted an extra budget of 31.8 trillion won one month into his term that included his flagship voucher handout programme to boost domestic demand that dropped in the wake of his predecessor Yoon Suk Yeol’s failed attempt to impose martial law in December 2024. REUTERS