Another extra budget
Focus support on groups hit hardest by pandemic
Minister of Economy and Finance Hong Nam-ki said Friday that the government is considering drawing up another extra budget this year. He said the administration would not issue additional bonds, but use larger-than-expected tax revenue to finance the supplementary spending. This year’s revenue is likely to top 300 trillion won (US$269 billion) compared to an initial projection of 282.7 trillion won; thus the ministry can mobilize around 17 trillion won for the second extra budget of 2021.
However, the ruling Democratic Party of Korea is pushing to provide one-off emergency cash handouts to all households. If the ruling party decides to give 300,000 won in relief money to each person, that alone will require at least 15 trillion won, increasing the size of the extra budget to more than 30 trillion won. Still, the finance minister is negative about universal cash handouts, heralding a clash with the ruling camp during consultations.
Hong’s views appear to be reasonable, given the country’s current economic conditions and fiscal situation. The government formulated a budget of 558 trillion won for this year, up 8.9 percent from 2020. The budget planners added the first extra budget of 14.9 trillion won in March. Suppose they draw up the second extra budget on a scale of 30 trillion won. In that case, the total size of the two supplementary budgets will exceed the 42.4 trillion won for the four extra spending bouts of last year. The national debt-to-GDP ratio also rose from 38.9 percent, when the main budget of 2020 was formulated, to 48.2 percent after the first extra budget this year.
The Bank of Korea forecasts the nation’s economy will grow 4 percent this year. The government can ill afford to increase its debt further to raise the growth rate by 0.1-0.2 percentage points. Budget spending plays an essential role in getting over the economic impact of the COVID-19 pandemic. However, no less crucial than increasing spending is spending wisely. Policymakers and politicians should prioritize compensation for small businesses and other vulnerable people hit hardest by the pandemic. Cash handouts to all households may please people temporarily. But they should not be sought at the expense of the country’s fiscal health.