Timing is key
The government has come up with a supplementary budget to rejuvenate an economy hobbled by the Middle East respiratory syndrome (MERS) outbreak and a severe drought. The amount is 11.8 trillion won ($10.5 billion) - 5.6 trillion won to make up for an expected loss in tax revenue, and 6.2 trillion won to use for countermeasures for MERS and the drought. If you include the government’s advanced investments, the size of the supplementary budget hits 21.7 trillion won - 1 trillion won more than in the previous year.
As a supplementary budget is supposed to ease drastic fluctuations of the economy after a sudden shock, it is important to strike a balance between economic stimuli and fiscal solidity. The government must first diagnose the current state of our economy before coming up with an appropriate prescription. Internally and externally, our economy has been afflicted with the outbreak, drought, a slowed economy in China and repercussions from Greece’s fiscal and debt crisis. Despite a 7 trillion won increase from a year earlier, the 22 trillion won supplementary spending could be insufficient given all the disadvantageous conditions around us.
If you exclude the 5.6 trillion won that compensates for an expected loss in tax revenues, only 6.2 trillion won are left to rev up the slowed economy. Even though the government drew up a 17 trillion won supplementary budget in 2013, that ended up lifting our growth rate by a meager 0.3 percent point. Considering that economic damage from the MERS outbreak is estimated at 0.3 percent of our gross domestic product, it would actually need something like 9 trillion won in fiscal stimulus.
We called for a sufficient and rapid supplementary budget from the outset to put our supine economy back on its feet. Though this is not a satisfactory amount, the government must seek maximum efficiency when implementing the stimuli measures. Instead of pumping money into the economy for short-term stimulus, it must spend more in elevating our growth potential over the long run - like an investment in extending our outdated tourism infrastructure.
The inevitable increase in national debt after issuing national bonds must also be curbed. After the supplementary budget is drawn up, our national debt will rise to 37.5 percent of our GDP, a 1.8 percent surge. Though the figure is much smaller than those of advanced economies, we cannot relax. Only when the supplementary budget leads to a solid economic recovery - and more tax revenue later - can our fiscal health become solid.
Speed is key to the supplementary budget. The National Assembly must pass the budget bill by July 20 to gain maximum effect. The opposition contends that the budget includes populist projects aimed at next year’s general elections. They must stop carping and recognize the bigger picture.
JoongAng Ilbo, July 4, Page 26