Reckless spending must be cutConsumption has come to a stop, hitting the economy with a double whammy amid protracted sluggishness in exports. According to the October consumer price data from Statistics Korea, the inflation rate stayed flat despite a jump in gas utilities and taxi fares. Factory product prices fell 0.3 percent as the result of subdued demand. State think tank Korea Development Institute also pointed to poor demand for the stubbornly subdued inflation.
Some warn of deflation. Consumer prices have been flirting around zero after a dip under the threshold in August and September. Inflation has been under 1 percent for the 10th month, the longest period since 2015, when Koreans stayed home due to the outbreak of Middle East Respiratory Syndrome.
The signs are everywhere. Once-bustling Garosu-gil district in Sinsa-dong, southern Seoul, shows shop and building vacancy rates of 18 percent. Two years ago, there had not been a single vacant shop.
With both domestic and external demand losing ground, the Korean economy has lost vitality. Hong Nam-ki, deputy prime minister for the economy, called for “radical” measures. External factors such as trade wars cannot be helped. Authorities must do their utmost to revive consumption. The Bank of Korea has cut the policy rate twice this year to bring it to the historic low of 1.25 percent. Cheap liquidity should stimulate consumer and corporate spending. But loan rates have gone up instead. Over the last two weeks since the policy rate cut, mortgage rates at KB Kookmin Bank went up 15 basis points.
What hampered the monetary action effect was fiscal deficit. Due to supersized budgeting two years in a row, government debt issues could reach 130 trillion won ($112 billion) next year, 60 trillion in new offerings and the rest in rollovers. Market yields have gone up after the government announced the supply plan in August. Yields go up when supplies increase. Fiscal expansion has restricted the effect of monetary easing at a time when double policy must be in full synergy to prop up the sagging economy.
Public finance must be reexamined to keep debt issues in check. Fiscal expansion is necessary during a troubled economy. But an increased budget should be used to boost the economy for the short and long-terms. The 2020 budget has too many wasteful loopholes. The budget for the National Intelligence Agency was increased by 30 percent. About 12.2 billion won was allocated to support Zero Pay, a Seoul-sponsored direct pay system, although few use it. Subsidies for job security were expanded by 100 billion won. Reckless spending must be cut back.