Choi Sang-mok, who heads the Economic Policy Bureau of the Ministry of Strategy Finance, recently explained the government’s economic management plans for the latter half of this year, adding that its basic policy line has not changed from H1. His statement reveals that the government will not stimulate the domestic economy as aggressively as it did during the 2008 global crisis, but rather focus more on mild reform, despite admitting that current economic conditions are not that positive and that it had to revise its growth forecast downward from 3.7% to 3.3%. In short, the Korean government is intending to provide against the recession over the long-term.
Its scheme is to prepare 4.5 trillion won among the fiscal expenditure for H2 adding up to 8.5 trillion by minimizing the budget unspent or carried over to the next term. It is trying to create effective demand for economic recovery by making the most of its financial resources for the support of small businesses and the expansion of public investment, while refraining from taking measures that can increase national debt, e.g. a supplementary budget. This indicates that the government is giving priority to its goal of achieving balanced finance by 2013.
“There is no shortcut or easy way to ride out the economic downturn. What we need to do now is become stronger steadily rather than taking a swift or decisive move. It can be compared to someone who tries to lose weight and increase physical fitness by cutting down on smoking and drinking,” said Minister of Strategy and Finance Park Jae-wan in his keynote speech at the Small Business Leaders Forum in Jeju hosted on July 27 by the Korea Federation of Small and Medium Business. The remark is interpreted as a roundabout way of saying that the government is in no position to buoy the economy through aggressive large-scale measures immediately after the recent revision of its growth estimate.
In 2008, during the global financial crisis ignited by the Lehman Brothers shock, the Korean government increased fiscal spending and monetary supply in an attempt to resolve the situation within a short period of time. However, it is now considering that the government debts and inflation rate that soared during the course triggered the turmoil as of late in the end. Furthermore, current fiscal conditions are much worse than before the crisis and the low interest rate is continuing, which is the reason why the incumbent administration is abstaining from adopting an expansionary macroeconomic policy.
Director Lee Myung-hwal of the Macroeconomic & International Finance Division of the Korea Institute of Finance commented, “The eurozone crisis is affecting the overall global economy these days, but Korea is hanging in there relatively well, growing more than 3%.” He added, “In such circumstances, aggressive stimulus packages like a supplementary budget are likely to have limited effects at best, serving only to narrow the government’s financial leeway.”
Most economic experts are rather positive about the policy, claiming there is no need for the government to overstretch itself while the predicament in the eurozone lingers on. However, others are criticizing is the government for taking a safe course based on an excessively optimistic view of the economy.
Fiscal Expenditure, the Last Resort for Government Trapped by Dogma
The government recently forecasted that the Korean economy would grow 4.3% in 2013, which is no less than one percentage point higher than its estimate for this year. The figure is even higher than a number of predictions from international organizations such as the IMF’s 4.0%. For instance, both The Bank of Korea and the Korea Development Institute have estimated a growth rate of 4.2%.
Unlike the Korean government, international bodies are rushing to adjust their global economic forecast downward amid the European crisis. The IMF, which suggested a 3.5% growth in April, is also recalculating the rate more conservatively.
It has been also pointed out that the Korean government is drawing too rosy a picture for 2013, despite being fully aware that the global downturn is poised to bring about long-lasting slow growth, which makes no sense at all. Some are claiming that the government is blinded by the dogma of balanced finance. The way they see it, the administration is bound by the goal, despite shrinking effective demand around the world and surging domestic household debts driving the national economy into a corner. They are blaming the government, saying that it is adding to the severity of the recession by tying itself up and missing the timing of pump priming.
It is ironic that the government is insisting on balanced finance on one hand, yet mobilizing state-owned enterprises (SOEs) in national projects to increase their indebtedness on the other. Furthermore, the reduction in tax revenues caused by sluggish domestic consumption is creating a vicious cycle.
Fiscal Outlays are Urgent for Growth Rather than Welfare
The current administration’s obsession with balanced finance is based on the country’s high dependence on trade. The stance is inevitable in some aspects because the high reliance on exports requires it to pay particular attention to international creditworthiness. The problem is that the government is failing to improve its credit ratings as its belt-tightening efforts are laying a burden on the private sector and SOEs. The size of the latter’s debts exceeded that of the sovereign debt last year, while outstanding household liabilities have skyrocketed over the past couple of years. Both can be attributed to the administration’s over-concentration upon its own fiscal health.
Economists are arguing that the government must have a more flexible view in regards to fiscal spending expansion. “The preemptive role of the fiscal side is getting more and more important nowadays as the global economy is deteriorating at a faster pace than before,” remarked Korea University professor Oh Jung-keun, “Fiscal expenditure needs to be increased with the focus laid on growth rather than welfare.” Professor Ha Joon-kyung at Hanyang University echoed, “As seen in the case of Japan, stimulus packages based on budget deficit is no problem at all when the trade balance is in the black, and it implies that Korea can expand the budget as long as its trade surplus is maintained.”
Still, the Ministry of Strategy and Finance is sticking to its stance that economic stimulation is not allowed until the quarter-on-quarter growth rate declines on at least two consecutive occasions. “It seems that we may as well save our ammo and hold out as long as possible since the external risks are sure to be lasting for a while,” commented the minister.
He is also known to have said in private, “Fiscal expansion and supplementary budget will be examined only after this year’s growth rate falls to slightly over 2%.” Although the government is forecasting a growth rate of around 3.0%, the possibility cannot be ruled out that it will fall to 2% because the figure for Q1 was 2.8%, and the global economic outlook for the second half is still cloudy.