Creating a virtuous cycle of growth and finance

Lately, the Korean economy is struggling as economic recovery slows down. In the second quarter, the economy grew by 0.5 percent compared to the previous quarter, the lowest in seven quarters. The continued low-price trend is worrying. Moreover, the decrease in imports means a recession trade surplus, and the combination of low growth, low price and an excessive trade surplus makes the future of Korea’s economy murkier. Low growth has resulted in a third consecutive drop in annual tax revenue, and national finance has been negatively affected.

At this juncture, the government added 20 trillion won ($19 billion) in next year’s budget proposal. The rate of increase is the largest since 2009. The expanded budget may be desirable as the government has strictly evaluated the economic situation and is willing to respond more aggressively to the market situation.

Of course, as the Korean economy hasn’t found momentum for economic recovery, it is doubtful that expanding fiscal expenditure would revive the economy. Expanded fiscal spending is only the priming water to evoke corporate investment mentality and consumer spending sentiment. Therefore, in addition to the expansion of fiscal spending, market-friendly policies such as interest rate cuts and regulation reform should be implemented to maximize the synergy in policies and accomplish economic growth and fiscal health at the same time. If consumer and investment sentiments revive based on various policies, the Korean economy can attain solid growth, and increased income in households and businesses would naturally lead to expansion of national wealth, creating a virtuous cycle of economic prosperity.

Government spending is expected to grow inevitably due to reunification and aging of the society, so in order to prepare for increased spending, we need to consider “spending efficiently and making more” instead of “being frugal and spending sparingly.” Securing fiscal health without growth is not a sustainable plan. Creating a virtuous cycle of growth and finance is the best strategy to maintain and recover medium and long-term fiscal health.

by Bae Sang-geun Vice president of the Korea Economic Research Institute