Two faces of fiscal stimuli

Lee Sang-ryeol

The author is an editorial writer of the JoongAng Ilbo.

The Korean government under the fiscal supervision of the International Monetary Fund (IMF) following a bailout to avoid the default in the wake of the 1997 Asiana financial crisis clashed with the global lender over expanding its budget. The IMF called for a budgetary increase in the process of stringent restructuring, but the government refused to compromise its fiscal integrity. At the time, an IMF official said he had never seen a government defying the lender’s advice on increasing fiscal spending regardless of deficit.

The IMF felt that Korea was strange as its government refused to spend more despite its relatively sound fiscal condition. The fiscal health the Korean budget authorities struggled to maintain helped the country overcome the financial crisis faster than expected. The public funds of 169 trillion won ($127 billion) used to restructure the financial and corporate sectors came from strong fiscal integrity. The government debt-to-GDP ratio now exceeding a whopping 50 percent was 11.1 percent in 1997.

The exemplary fiscal management was alarmingly shaken under the Moon Jae-in administration. The liberal government methodically put fiscal policy at the forefront of its economic policy. The extraordinary event of the Covid-19 pandemic also played a part in the budget increase. President Moon even challenged Finance Minister Hong Nam-ki to present the grounds for his sticking to the debt-to-GDP ratio at 40 percent when he was reluctant to raise the level. The government reasoned that sufficient fiscal spending to spur economic growth would eventually help contain the debt level. That was not a good idea. The hefty spending caused national liabilities to stretch by 500 trillion won from 660 trillion in 2017 to 1,069 trillion won in 2022 over the five years under the Moon administration.

Following the prodigal spending under the liberal administration, fiscal policy has become an ideological symbol. An approach to fiscal policy differed by political front. The conservatives argue for a budgetary tightening because immoderate spending can undermine economic fundamentals. But the liberals call for more aggressive spending as Korea’s fiscal conditions are relatively sound compared to other countries.

The disagreement suggests a bumpy road for next year’s budget bill to be discussed in the National Assembly. The conservative Yoon Suk Yeol administration outlined next year’s spending at 656.9 trillion won, up 2.8 percent from last year, the smallest increase since 2005. President Yoon vowed not to comprise budget to buy votes ahead of the parliamentary elections in April next year. But the Democratic Party (DP), a majority in the legislature, insists on a budget increase of 6 percent, or 38 trillion won, accusing the government of condoning low growth and neglecting public woes from a recession.

Fiscal spending during hard times can help stabilize the economy. But it must be exercised without worsening fiscal health any further. Debt-financing is a bad idea. Despite heavy spending, growth was slow under the Moon administration. “Debt-financed fiscal stimuli is just like the morphine injection,” said Finance Minister Choo Kyung-ho during a parliamentary hearing on Aug. 22.

But the economy urgently needs a stimulus. The conservative administration estimates our growth to stop at 1.4 percent this year, the weakest except during crisis periods. The government rejects a resort to artificial stimuli. If so, it must use other options to stimulate growth. And yet, deregulation, structural, or industrial reform policies cannot be seen.

Finance Minister Choo Kyung-ho speaks at a meeting with lawmakers of the People Power Party, Aug. 23, over the government’s budget plan for 2024. He compared the debt-financed fiscal stimuli to a morphine injection. [KIM HYUN-DONG]

The talk of a September crisis is gaining ground. The pandemic grace period for repayment on the loans to small merchants expires in September. Skeptics warn of a financial spillover if many of them fail to repay. But it will likely not happen. The maturity on 93 percent of the outstanding loan as of June, or 71 trillion won, will be deferred to 2025. Deferred payment which runs the risk of insolvency is only 1.05 trillion won. Still, concerns are growing due to a deepening slump with a sharp increase in the delinquency rate and files for individual bankruptcies. Various problems can spill over when the economy fails to grow. The government must come up with an aggressive policy to steer the economy out of the one percent growth range.