More harm than goodThe ruling Democratic Party (DP) is trying to give another round of disaster relief to all. On Tuesday, Rep. Yoon Ho-joong, DP floor leader, stressed the need to draw up and pass a supplementary budget, which includes more disaster relief, to comfort the public in its time of need. The crusade for handing out more cash to the public at large, both rich and poor, was initiated by President Moon Jae-in in February. If the DP’s proposal for the latest round of disaster relief passes the National Assembly, that will be a fifth package amounting to 30 trillion won ($26.9 billion), including compensation for losses by self-employed businesses during the pandemic.
This round of disaster relief will likely do more harm than good for the Korean economy. As the economy has started recovering, such a colossal cash handout is simply not needed. Thanks to the rapid rebound of the global economy as a result of vaccinations in places like the U.S. and U.K., the Bank of Korea has raised its projection for our growth this year to 4 percent from 3 percent. That should be a warning against the arbitrary unleashing of liquidity into the market. It is better for the government to tighten money supply to help control inflation and reduce its debt.
The national debt has already reached a dangerous level. It swelled to a whopping 1,000 trillion won from 660 trillion won in just four years after the launch of the Moon administration in 2017. More alarming is a government engrossed with making up for its red ink by issuing national bonds worth 100 trillion won a year since 2020. As a result, the debt-to-GDP ratio will hover around 60 percent in 2024. Korea will become a country with a dangerously high deficit.
Showering the public with free money will simply trigger spikes in prices. If interest rates go up, as they are sure to do, it could push marginal households and companies into bankruptcy. The DP-proposed 300,000-won handout per person will also exacerbate the polarization of wealth. As research by the Korea Development Institute shows, the effect of disaster relief was quite limited as the relatively rich people were not willing to spend the money. The DP points to an expected 30-trillion-won increase in tax revenues this year, but that’s just the base effect of the government’s lower tax revenue from last year.
The new round of cash relief will likely be doled out shortly before September, when the DP determines its presidential candidate for the 2022 election. As the Chuseok holiday is in September, it is good timing. But the handouts will likely backfire. The expected increase in tax revenues should be used for repaying the government’s debt to help lessen the tax burden on future generations.