Economic Uncertainty Index Rising Again Amid Political Gridlock

With the 2026 local elections just eight months away, the economic legislative battle between the ruling and opposition parties is intensifying. The Consumer Sentiment Index (CCSI) for October 2025, announced by the Bank of Korea, stood at 109.8, exceeding the baseline (100) and recovering rapidly after the martial law and impeachment crisis. However, as the budget conflict between the ruling and opposition parties has prolonged since November, the perception of economic conditions is slowing down again.

The Economic Policy Uncertainty (EPU) Index also remains at elevated levels. While consumer sentiment, which had fallen to the high 80s during the political turmoil, temporarily recovered, the EPU index has rebounded recently as diplomatic and political conflicts have reignited. Market experts warn that "unless the ruling-opposition gridlock is resolved, economic uncertainty will not easily decrease."

K-Chips Act Unable to Pass National Assembly for Over a Month

The 'K-Chips Act (Special Act on Strengthening Semiconductor Industry Competitiveness)', considered the most significant economic legislation of this regular session, has been stalled for over a month since being submitted to the National Assembly's Committee on Trade, Industry and Energy. Despite being crucial legislation to protect Korea's semiconductor industry competitiveness amid high U.S. tariffs and China's semiconductor ambitions, the ruling and opposition parties remain sharply divided over the support method.

The government and the Democratic Party are pushing for measures that increase tax credit rates (large corporations from 15% to 25%, SMEs from 20% to 30%) and strengthen legal authority allowing the government to directly manage seven high-tech industries including semiconductors, batteries, and AI. The Ministry of Trade, Industry and Energy has proposed amendments through the 'Phase 2 Roadmap for National Advanced Strategic Industry Development,' including shortened industrial complex permit procedures, expanded workforce development funds, and supply chain linkages for materials and equipment SMEs.

In contrast, the People Power Party is taking a cautious stance, arguing that "government-led industrial policy can reduce market efficiency and lead to tax waste." The opposition party is demanding a private sector-led approach centered on expanding investment incentives and deregulation, calling for further increases in tax credit rates (large corporations from 25% to 30%, SMEs from 30% to 35%).

On the 13th, the ruling and opposition parties agreed to submit 54 non-contentious bills to the plenary session, but the Semiconductor Special Act was excluded once again. Industry stakeholders are concerned about disruptions to business schedules.

Service Industry Development Act Also Adrift for 10 Years

The 'Framework Act on Service Industry Development' also faces uncertain prospects for passage during the regular session. This bill, which aims to ease regulations on new service industries such as healthcare, education, and content and establish a competitive foundation, has failed to pass the standing committee for the past 10 years due to partisan conflicts.

The ruling party is re-proposing it as an economic revitalization package bill with amendments focused on expanding tourism and medical service exports and tax support for the content industry. However, the opposition party strongly opposes it, citing 'privatization concerns.' In particular, they argue that provisions for opening the medical service industry could lead to 'commercialization of healthcare.'

Experts emphasize that "the speed of industrial structural change is outpacing legislative speed" and that "politics should not become a bottleneck for discussions on industrial competitiveness."

Budget Impasse Could Hit Q1 Growth Rate by 0.3%p

Budget negotiations are also facing difficulties. The budget bill submitted by the ruling party, totaling 728.8 trillion won in expenditures, centers on defending the economy through expansionary fiscal policy. The deficit is expected to be around 3% of GDP, with national debt projected to exceed 1,260 trillion won.

If budget processing fails due to legislative gridlock, the system will transition to a provisional budget regime as stipulated by the Constitution. In this case, all new investment projects would be suspended, government bond issuance would be delayed, and public projects would halt. Experts warn that such a situation could reduce Q1 2026 GDP growth by 0.2-0.3 percentage points.

Economic Public Sentiment Likely to Fluctuate Ahead of Local Elections [AI Analysis]

With eight months remaining until the June 2026 local elections, delays in processing economic legislation and the budget are likely to be burdensome for both the ruling and opposition parties. As the Consumer Sentiment Index and Economic Policy Uncertainty Index respond sensitively to political developments, voters' economic perceptions are expected to directly impact election results.

While expansionary fiscal policy is advantageous for short-term stimulus, it increases debt burden; austerity measures improve fiscal soundness but can slow economic recovery. Although a bipartisan compromise is emerging as a realistic solution, concerns are growing that if political confrontation continues, both fiscal and industrial sectors will face an 'winter of uncertainty.'

With the global competitive environment rapidly changing for both the semiconductor and service industries, whether the political establishment can swiftly process legislation to strengthen industrial competitiveness is expected to be an important variable for Korea's economy going forward.