In announcing economic policy direction for the second half of the year, the government cut its outlook for 2015 growth by 0.7 percentage point to 3.1 percent. The downgrade reflects sluggish demand at home and abroad.
Moreover, prospects are worsening. Abroad, the Greek debt crisis has resurfaced and the United States is poised to raise interest rates. At home, domestic demand has been hit hard by the outbreak of Middle East respiratory syndrome. The economy will be able to grow 3 percent only when backed by 15 trillion won ($13.4 billion) in fiscal stimuli, including a supplementary budget.
Despite the urgency, the government and ruling party are wrangling over the scope and means of creating the additional budget. The ruling party wants the extra budget be customized to support MERS-hit areas and industries. The government argues it needs at least 10 trillion won to help drought-stricken areas and stimulate the overall economy. It is strange why the ruling party is so conservative about the scope of a supplementary budget when even the opposition party agrees it is needed.
The bigger and faster a supplementary budget is created, the better in these economically trying times. In 2013, an additional budget of 17 trillion won was created, but it helped boost the growth rate a mere 0.3 percent. Circumstances at home and abroad are worse this year. Repercussions from the MERS shock have taken a bigger toll on the economy than last year’s Sewol ferry sinking. According to the Bank of Korea, consumer sentiment in June plunged to a 30-month low. If sufficient funding is not pumped into the economy and used wisely, the money might be wasted. Japan’s economy was mired in stagnation for two decades, despite expansionary fiscal policy, because of an ill-considered spending plan. We must not forget that we erred disastrously with the MERS outbreak because we kept strictly to the quarantine manual and missed the loopholes.
While organizing a supplementary budget, the government must re-examine tax income estimates, as well. A fiscal deficit has been piling up the past three years, suggesting the government overestimated revenues.
If the revenue outlook is not revised, the state could be headed toward a fiscal cliff due to a shortage of tax revenue in the fourth quarter. Structural reforms in the key financial, labor, public and education sectors also need to be accelerated to strengthen the fundamentals. It’s worrisome that the government appears to have given up on reform amid strong protests from labor.
JoongAng Ilbo, June 26, Page 30