22 trillion won plan for stimulus described

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22 trillion won plan for stimulus described

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The government announced a detailed spending plan for a 22 trillion won ($19.5 billion) stimulus package including a 11.8 trillion won supplementary budget to help an economy hit hard by the outbreak of Middle East respiratory syndrome (MERS) and a drought.

With the measures, Korea’s economy will be able to reach 3 percent annual growth for this year, the government said.

Spending to support hospitals and businesses will amount to 2.5 trillion won, according to a plan released by the Ministry of Strategy and Finance on Friday. The expenditures include building more facilities and equipment for hospitals to cope with disease outbreaks and special loans for hospitals that lost money during the outbreak. They also include financial support for small and midsize enterprises in industries affected by the virus, particularly tourism.

About 800 billion won will be spent on dealing with the drought. That includes expanding infrastructure for water supply and stabilizing prices of agricultural and fishery products. The promise came after the latest prices statistics show a spike in the selling price of produce, particularly napa cabbage, the main material used in kimchi. The rise was 90 percent year-on-year.

Creating jobs for young people and the elderly will cost 1.2 trillion won, according to the plan. The government will offer financial support for companies that adopt the so-called peak wage system, which reduces salaries of senior staffers a few years before their retirement. If companies with the system maintain employment for senior workers and hire young workers at the same time, they will receive special subsidies dubbed “win-win employment.”

The government finalized the supplementary budget bill at a Cabinet council meeting on Friday. The bill will be submitted to the National Assembly on Monday.

It is the fourth-largest supplementary budget since Statistics Korea started collected data in its current form.

The biggest supplementary budget of 28.4 trillion won came in 2009 when Korea was struggling with the global financial crisis. The second-largest, 17.3 trillion won, was adopted in 2013, the first year of the Park Geun-hye administration. The third was in 1998, to spur an economy battered by the 1997 Asian Financial Crisis.

This is the first time a president allocated a supplementary budget of more than 10 trillion won twice during his or her term.

Of the 11.8 trillion won extra budget, 5.6 trillion won is dedicated to making up for the tax shortfall this year, while the remaining 6.2 trillion won will be used for stimulus projects. The 11.8 trillion won consists mostly of government bonds, of which 2.2 trillion won comes from the Bank of Korea surplus reserve and government funds and the rest of 9.6 trillion won would be filled by issuing government bonds.

Besides the supplementary budget, the Finance Ministry decided to include additional spending worth 10.2 trillion won in the 22 trillion won stimulus package.

The 10.2 trillion won mostly comes from early execution of budget items that don’t require permission from the National Assembly, including a government fund (3.1 trillion won), early spending from state-run organizations (2.3 trillion won) and financial aid from the state-run Korea Exim Bank (at least 4.5 trillion won).

With newly issued government bonds of 9.6 trillion won, Korea’s national debt is expected to rise from 569.9 trillion won to 579.5 trillion won. This means that Korea’s national debt-to-GDP ratio will be 37.5 percent, up 1.8 percentage points.

Analysts pointed out that the 5.6 trillion won that makes up for last year’s income tax shortfall may turn out to be the worst factor for the nation’s fiscal soundness.

“The government’s decision [of spending nearly half of the extra budget just to fill up the tax shortfall for this year] has been caused by its own fault of incorrectly calculating tax revenue,” said Jeon Seong-in, an economics professor at Hongik University.

“The government used overblown economic growth and inflation rates when compiling the budget last year.”

Expert opinion diverged regarding the effectiveness of the 22 trillion won stimulus package.

Lee Sang-jae, head of the investment strategy department at Eugene Investment and Securities, said the Korean economy may be able to gain growth momentum over 3 percent in the latter half if the MERS crisis is finished.

However, Korea Development Institute researcher Kim Seong-tae said the 11.8 trillion won extra budget is still too small to lift growth back above the 3 percent mark, and Yonsei University Professor Sung Tae-yoon also said the supplementary budget should have been at least 20 trillion won for a rebound in growth.

Whether the stimulus packages will be passed by the National Assembly is still unclear.

While ruling Saenuri Party lawmakers are calling for a quick passage, the main opposition New Politics Alliance for Democracy says it needs time to review the plan.

“We will persuade the opposition parties to quickly deal with the plan,” said Yoo Seong-min, floor leader of the ruling party on Friday.

Cho Hae-jin, another Saenuri Party leader, said, “We will hold an extra session starting July 8 to pass the supplementary budget plan no later than Aug. 20.”

An Min-suk, a New Politics Alliance for Democracy (NPAD) lawmaker who is a member of the assembly’s Special Committee on Budget and Accounts, said, “Although the government announced the supplementary budget plan, the truth is it is trying to cover up its failures in policy-making for the economy.

Kang Gi-jung, a third-term NPAD lawmaker, said, “In 2013, when the government announced a supplementary budget, it took more than 20 days to pass it.”

BY KIM HEE-JIN, LEE TAE-KYUNG [kim.heejin@joongang.co.kr]
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