The Korea Development Institute (KDI) recommended the Ministry of Strategy and Finance to reduce financial expenses over time, maintaining that the government’s supplementary budget last year deteriorated fiscal sustainability while resulting in limited short-term economic growth. Korea Herald Business reported the news on Nov. 7, adding that the advice contradicts Deputy Prime Minister and Minister of Strategy and Finance Choi Kyung-hwan’s expansionary fiscal policy for economic revival, dubbed Choinomics.
“It seems that the supplementary budget of last year was appropriate in timing and scale in view of past experience, but it did compromise the government’s fiscal health,” the KDI said in its report commissioned by the Ministry. The report also read, “The role of fiscal policy needs to be reduced for the time being in the interest of fiscal sustainability.”
The Deputy Prime Minister overturned his predecessor’s economic policy immediately after taking office in July. He announced he would invest 41 trillion won (US$37 billion) into economic stimulation, and then fiscal expansion would follow in 2015. Housing market deregulation was at the center of his growth-oriented economic policy. His team relaxed the loan-to-value (LTV) and debt-to-income (DTI) regulations and cut the taxes on lease income while easing various rebuilding restrictions. The policy packages of the influential ruling party figure, versed economist and one of the closest aides to President Park Geun-hye were well-received by market participants. Many anticipated that the Korea Composite Stock Price Index (KOSPI) would reach 2,200 points this year and 2,500 next if Choinomics turned out to be successful.
Their expectations turned out to be short-lived though. The KOSPI dipped below the 2,000 point mark on Oct. 1 and foreign investors are flocking out of the bourse. Although both developed and developing countries are struggling with declining economic indices, the situation is particularly worse in the Korean economy. Korea’s stock market and foreign exchange volatility is the highest among those of seven major Asian economies. The depreciation of the Korean currency against the U.S. dollar outpaces those of the other six, too.
The fiscal expansion plan is not going as scheduled, either. According to the ministry’s data, the government was supposed to spend 199.3263 trillion won (US$182.4314 billion) of budget and funds for the first nine months of this year, but actual spending was limited to 188.8935 trillion won (US$173.5742 billion). “This is because the government, pressed by the urgency of economic stimulation, was in a hurry to announce the plan without sufficient specific details, and its arms are now in confusion over where to spend the budget,” an economist mentioned.
Besides, the jeonse, or housing deposit, loan balance reached a new high this year with the new loans taken out between January and August reaching 10.4 trillion won (US$9.5 billion). This means that the Deputy Prime Minister’s prediction that housing market deregulation would lead to an increase in home prices and then to some stability in jeonse prices has missed the mark. In fact, no less than 11 civic groups have criticized him since his appointment as the Deputy Prime Minister that his DTI and LTV-based housing market deregulation plan for economic revival is anachronistic.
Last month, the Bank of Korea adjusted its GDP growth forecast for this year to 3.5 percent, 0.3 percent percentage points down from its estimate released in July. In addition, it lowered the forecast for 2015 from 4.0 percent to 3.9 percent.
Economic Advisors to President Park Geun-hye Join Critics
Under the circumstances, an increasing number of experts are becoming pessimistic about Choinomics. Some of them are even saying that his policy is just another version of Abenomics and it will drive Korea to what is similar to Japan’s two lost decades.
“The Choinomics, in the end, is just about stimulating the economy with debt,” the SDI Institute remarked, continuing, “What we need now is industrial and debt restructuring to provide against the long-term recession Japan went through, although the process is unlikely to yield visible results in the near future.”
Economic advisors to President Park Geun-hye are also criticizing Choinomics. Former Presidential Secretary for Economy Kim Jong-in recently said that deflation could linger on, despite the expansionary fiscal policy and interest rate cut, until the emergence of a long-term recession characterized by swelling debt.
“The effect of the stimulation policy is limited at best, yet it could result in a debt trap,” said Institute for the Future of State Director Kim Kwang-du, who created the concept of the Creative Economy for the President. He went on to say, “The national debt, including those of state-run enterprises, the national pension fund, and military pensions, has already reached the level of advanced economies, and the pace of debt increase is faster than theirs. But, the government is too optimistic.”
Ruling party lawmaker Lee Han-ku also warned earlier this month that the Deputy Prime Minister’s housing policy would exacerbate the problem of household indebtedness, while financial institutions bearing the burden would have to witness their credit rating fall.
With the situation as it is, the Deputy Prime Minister is being increasingly criticized for his failure to deal with fundamental problems, one typical example of which is tax increases. Cigarette prices, residence taxes, and automobile taxes are planned to be hiked but the public is blasting it. Household liabilities are going up with the tax revenue estimated to be decreased by over 10 trillion won (US$9.2 billion) this year. The President’s plan for public enterprise reform is losing steam amid controversy over parachute appointments.
In the meantime, Deputy Prime Minister Choi is blaming the political community for the current economic recession. “It is unfair to say that the government is under-prepared for economic restoration, or I am not capable of doing so,” he said at the parliamentary inspection last month, adding, “Rather, I hope to see the National Assembly pass relevant laws so that the economy can be resuscitated.” Before taking office, he was a three-time lawmaker and served as the floor leader of the ruling party.