Spending solutions

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Spending solutions

The Moon Jae-in administration is lucky given the relatively favorable economic conditions at home and abroad. As the global economy is poised to rebound, a Korean economy heavily relying on exports can ride the tide. The government does not face any such emergency as the foreign exchange crisis at the start of the Kim Dae-jung administration (also known as the Asian financial crisis), the credit card bubble that burst shortly after the launch of the Roh Moo-hyun government and the global financial meltdown during the Lee Myung-bak administration. Such an amicable environment could allow the government to come up with quite an expansive program.

The government presented Tuesday a detailed economic roadmap. The five-year plan is focused on shifting our economic paradigm from the current growth-based focus to a so-called “human-centered economy.” It aims for income-driven growth, to create jobs, spur innovation and be fairer.

What attracts our attention is a sharp increase in government spending as seen in its intention to grow the budget at higher rates than the economy grows. Considering the government’s forecast that the economy will annually grow between 4.5 percent and 5 percent for the next five years, it will likely increase fiscal spending by more than 5 percent each year. The Park Geun-hye administration upped spending by only 3 percent annually.

The Moon administration cares little about the criticism that it likes big government. But fiscal health is the last bastion of our small and open economy. Korea was able to weather the 2007-8 global financial meltdown thanks to our healthy fiscal condition.

What kind of correlations are there between fiscal stimuli and economic growth? One of the best barometers is the “fiscal multiplier,” which refers to the ratio of how much aggregate GDP will increase for a unit increase of fiscal spending. Korea’s current fiscal multiplier is between 0.4 and 0.5, which means that regardless of the size of a fiscal input, the economy grows only half of it. Due to the very inefficient growth pattern, the Ministry of Strategy and Finance opposed the idea of drawing up a supplementary budget to boost the economy.

Of course, the multiplier is not all. But the government needs to pay heed to economists’ warnings that Korea’s multiplier is much lower than in Europe and the United States. If the government is required to endlessly pour water to revive a barren economy, it’s not priming the pump anymore. The Moon administration best not forget that.

JoongAng Ilbo, July 26, page 30
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