For a supplementary budget to succeedAfter the Bank of Korea lowered the interest rate, a supplementary budget has been passed. These measures reflect serious economic conditions. Since the supplementary budget comes from a debt, we need to focus the spending on areas with bigger impacts. According to academic research, the fiscal multiplier of government investment spending is around 0.8, government consumption spending is around 0.5 and transfer spending is near zero. Therefore, investment spending, such as on infrastructure that leads to great impact and promotes continuous growth, should be prioritized over transfer spending like welfare and social job creation.
The recently announced Korean New Deal is a good example. Dams should be constructed. Since the electricity shortage in the summer forces factories to modify operation schedules, investment on energy is also necessary. Old subways, waterworks and sewage facilities require renovation and repair. Investments to build a northeast logistics hub, such as port facilities, are also needed. Since Korea went through the Sewol ferry tragedy and the Middle East respiratory syndrome outbreak, the need for safety and disease control is growing. It is also urgent to address traffic congestion in the capital region. It is desirable to make investments that can lead to job creation rather than welfare or transfer spending, which have temporary effects and leave debts. Even when the country was poor in the 1960s, people who planted trees in the mountains or participated in road construction received rations.
Another important variable is how the fund is raised. This year, a shortage of about 8 trillion won ($6.75 billion) in tax revenue is expected. In the end, treasury bonds need to be issued, which will result in a market interest rate hike. For the supplementary budget in 2013, the market rate increased and partially set off the effect of the supplementary budget. Regulation reform is also important. As of May 2015, there are 14,681 registered regulation cases. When regulation is reduced by 10 percent, facility investment goes up by 4 percent and growth is enhanced by 0.36 percent. While regulatory authorities and interest groups will oppose, regulatory reform should be pursued with strong leadership. When the interest rate is cut and the New Deal and regulatory reform work together, Korea will be able to overcome the crisis.
by Oh Jung-gun, Professor of financial IT at Konkuk University