Recently, the supplementary budget proposal worth 26.2 trillion won, which has been socially controversial as the "war supplementary budget," was passed in the National Assembly. Some of this budget, specifically the support fund for victims of high prices, is now being directly transferred to citizens. The government and the ruling party have claimed the slogan "debt-free supplementary budget" regarding this budget allocation. The core points are that no new government bonds were issued and that the surplus tax revenue collected more than expected by the government is being utilized. On the surface, there was no new tax imposition and the national debt did not increase, so they claim it is a "kind supplementary budget." However, if we examine the economic mechanisms that occur when the government raises funds and increases expenditure, we can question how dangerous this claim is.
Let's assume a case where the government increases taxes despite political burdens. In this case, similar to when issuing government bonds, we can expect an effect of revitalizing the economy in the short term. However, from a long-term perspective, it is highly likely that the result will be a rise in prices rather than bringing about a substantial change in national income. There are also claims that attempts to stimulate the economy through tax reductions fail to have an effect in the long term. If a fiscal deficit occurs due to tax reductions, the national debt increases, which implies that the government will have to increase taxes again in the future to pay off the debt. If economic agents anticipate future tax burdens, they may save or reduce expenditure even if their disposable income increases at the moment.
The representative theory explaining this phenomenon is the Ricardian Equivalence Theorem, or the Equivalence Theorem. According to this theory, when the scale of government expenditure is constant, the impact on the entire economy is the same regardless of whether the funding is raised through taxes or government bonds. However, there are clear limitations in applying this theory unconditionally to the real economy. First, it is difficult to assume that all economic agents accurately predict future tax burdens and make current consumption decisions based on that. Additionally, if the debt is not one that I have to repay directly, the motivation to reduce consumption considering the burden of future generations may be weak. Nevertheless, the National Assembly Budget Office warned in a related report that a supplementary budget utilizing surplus tax revenue produces similar effects in terms of issuing additional government bonds and fiscal soundness. There is no difference in that ultimately, whether it is newly printed money or taxes, government funds conclude as a burden on the nation.
There are three ways for the government to raise funds: collecting more taxes, issuing government bonds to borrow money, or printing money through the central bank. Increasing taxes faces significant political resistance, so the government tends to prefer issuing government bonds, which is relatively less burdensome. Increasing expenditure by issuing government bonds increases the total demand of the entire nation, producing an effect of activating the economy, but this is not increasing total supply. If only demand increases while supply is fixed, prices rise, which in turn dampens demand, and in the long term, it becomes a factor that reduces total supply by raising the prices of production factors including wages. Therefore, increasing expenditure through government bonds brings only short-term income increase and price rise, and in the long term, prices may remain at a high level.
When considering whether tax reduction or government bond issuance is better, it may appear that tax reduction increases disposable income and creates the ability to consume. However, even in this case, the economic stimulation effect lasts only in the short term and returns to the full employment national income level in the long term. This is similar to getting a few more points by cramming right before an exam, while practical ability is important. Ultimately, whether it is taxes or government bonds, newly printed money, or government expenditure, all return as a burden on the nation. If we print more money and increase the money supply, the value of currency falls and prices rise, which produces a result equivalent to collecting more money than taxes. Therefore, the expression "kind supplementary budget" may be nothing but an illusion when considering economic reality, and the fact that the nation must bear this cost does not change.