How long will fiscal stimuli work?

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How long will fiscal stimuli work?

The gross domestic product (GDP) increased 1.1 percent in the second quarter compared to the previous three-month period, reversing from a 0.4-percent fall in the first quarter to the fastest growth since the third quarter of 2017. But the numbers are hardly comforting. Even the modest second-quarter gain looks remarkable thanks to the poor figures across the board in the first quarter.

While exports fell 3.2 percent in the first quarter, they increased 2.3 percent in the second quarter. Construction and facility investments have turned positive, but that was possible because of greater negative numbers in the first quarter.

The private sector has further deteriorated. Its feeble movement is entirely buttressed by tax spending. The private sector’s contribution to GDP growth slipped 0.2 percent in the second quarter, compared with a 0.1-percent gain in the first quarter.

Meanwhile, the government’s contribution to GDP growth rose to 1.3 percent from negative 0.6 percent. Without fiscal spending, GDP would have extended a loss in the second quarter. Worsening trade terms — despite heavy fiscal spending — resulted in negative GDP. The growth is not led by income, but taxes.

Government spending cannot sustain growth for long. Tax revenue has been slow due to worsening business. National tax collection fell for the fourth month in a row after staying in the positive until January. Tax collection rate so far has been 47.3 percent to the annual target as of May, down 5.1 percentage points from a year ago. Conditions on the external front have also worsened. As trade tensions between the United States and China linger, Japan is out to mount all-around export barriers on Korea. The Bank of Korea has cut this year’s growth target to 2.2 percent from 2.5 percent projected in April — a whopping 0.3 percent fall — but most think that the economy won’t even achieve this goal.

Fiscal expansion is necessary amid a receding economy. But efficient management of input is crucial. Most of the budget spending raises suspicion of targeting votes in the next general election rather than for sustainable growth. There are no signs of endeavors by the government to bolster fiscal balance. The tax code revisions for next year don’t have any efforts to address the loopholes in income tax where 40 percent of all workers do not pay a cent. It would be all well if the economy is revived on tax spending. But if it’s wasted, it would translate into a additional burden for future generations.
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