[PRO] Ailing economy needs a boost

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[PRO] Ailing economy needs a boost

*Government must act to stimulate the economy

The Korean economy is sinking fast. GDP grew a mere 0.1 percent from the second to the third quarter, the lowest in three and a half years. At that rate, growth in 2012 is unlikely to meet the central bank’s downgraded 2.4 percent estimate. Yet the government has no stimulus plan, being primarily concerned with staying within its budget. But calls are getting louder for more aggressive action to boost the sagging economy before it’s too late. Here are both sides of the argument.

The output gap, or the difference in actual and underlying GDP growth, is often cited as a good measure of how an economy is performing. The output gap is negative when the economy is underperforming and positive when outperforming. Authorities are advised to ease or tighten fiscal policy in line with the gap so the economy will perform as close to capacity as possible.

What is the best direction for fiscal policy? First we need to understand the current state of the economy. Exports have improved, but likely won’t be strong enough to pull the economy out of its funk. Domestic consumption also remains sluggish as corporate investment turned negative due to gloomy prospects. The Korea Development Institute and other major think tanks predict the economy to grow slightly over 2 percent this year and 3 percent next year. Even if the economy picks up slightly next year, it would take some time to recover to its optimal growth rate of about 4 percent.

In view of underlying cyclical and structural risks, authorities should be more aggressive in driving the economy. I am not suggesting reckless budgetary expansion, rather employing moderate fiscal maneuvering to prevent further widening of the output gap and jump-start the economy to shake it out of stagnation.

Increased spending could harm the fiscal status quo, but the country’s fiscal health remains relatively sound. Accelerated recovery or growth from stimulus actions can actually add revenue to fiscal coffers. But the government would have to keep to guidelines in undertaking any stimulus measures.

First, authorities should thoroughly examine external and domestic factors because shifting to expansionary policy and raising a supplemental budget is no easy task.

Since it takes time for the government to seek and get legislative approval for supplementing the budget and even longer for the spending to actually take place, authorities should expedite remaining budgetary spending and flexibly use public funds to help aid the economy in the meantime.

Second, new spending should primarily go to areas that could show immediate benefits. Also, the government should tolerate a decrease in national tax revenue this year because of the slowdown and grant extensions in tax exemptions and reductions in areas whose sunset provisions were due to expire at the end of the year.

Third, further expansionary steps should be taken within the boundary of maintaining fiscal stability. New spending should go to public infrastructure projects that can enhance the country’s growth potential and create jobs, and increased investment in social overhead projects like roads should be limited to working expenses so it does not continue to chip away at the budget.

Fourth, once the economy returns to solid growth, authorities should tighten spending in order to prepare for our aging society.

We have yet to return to a level of pre-currency crisis fiscal integrity level after national liabilities against GDP increased by 10 percentage points to recover from the crisis in late 1990s. National debt that increases during crises could seriously undermine fiscal sustainability.

Translation by the Korea JoongAng Daily staff.

*The author is associate fellow of the Korea Development Institute.
By Kim Seong-tae
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