The splurge continues

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The splurge continues

The ruling front has given in to the temptation to spend money once again. On Tuesday, the government and ruling Democratic Party (DP) agreed to hand out 250,000 won ($221) to 300,000 won in disaster relief grants to each citizen in the lower 80 percent income brackets. They will draw up an a 33-trillion-won supplementary budget, which will be the second largest in history.

The government considered the idea of selectively giving cash to people in the lower 70 percent income brackets, but accepted the DP’s proposal for a handout to the lower 80 percent. Under the guidelines, a family of four whose combined annual income exceeds 100 million won can receive the money. The DP is not worried about the largest-ever supplementary budget as the government can finance it with tax payments it has collected already this year. But many fiscal experts are raising concerns about the spending spree.

First of all, the timing is not good. The economy already shows signs of recovery as seen in the government’s readjustment of its growth target for this year to 4.2 percent from the 3 percent range. Excessive liquidity could push the economy to hard and raise the risk of inflation. After the consumer price index rose by 2.6 percentage points last month — more than the Bank of Korea (BOK)’s target of 2 percentage points — interest rates are likely to go up.

Releasing massive liquidity into the market will help prices and interest rates ascend. That’s why the central bank made it official that it will raise its benchmark rate within this year. The critical mismatch in which the government wants to spend more money than ever before while the BOK tries to reduce high levels of debt through rate hikes is a worry.

Another problem lies with the government’s misguided priority on spending. Announcing the second round of emergency grants earlier this month, DP floor leader Yun Ho-jung said the government is only returning its fiscal surplus to the people. But experts don’t think so. They advise the government use surplus tax revenues to repay the snowballing fiscal deficit. Due to the risky splurge since the pandemic, the government will soon confront a gargantuan national debt amounting to 1,000 trillion won. It must spend any tax revenue surplus paying back the debt

If the government releases such liquidity to the market, it will end up exacerbating wealth polarization too. Some also wonder at the 80 percent income brackets decision. It can stoke social conflict if the government cannot present feasible explanations.
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