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At the beginning of September, the government said it would increase budget spending by 8.5 percent next year to $468.5 billion from $431 billion this year despite little growth in revenue. This comes on top of three major stimulus packages it has introduced this year to support the economy in the wake of the COVID-19 outbreak, which pushed Korea into a technical recession.
Most of that money is expected to go to healthcare, welfare and employment programs and to support struggling industries in the auto, airline and shipbuilding sectors as well as small- and medium-sized companies.
Increased government spending is likely to continue if the recent surge of COVID-19 cases in Seoul poses a risk to the robust economic recovery that analysts had forecast for the second half of this year. The Bank of Korea, the central bank, recently cut its growth forecast for this year from a contraction of 0.2 percent to more than 1 percent due to the surge in new cases.
The increased spending has raised concerns that it has increased the government's budget deficit to almost 9 per cent of gross domestic product (GDP) this year, while growth in the fiscal deficit is expected to rise by 4.1 percent over the next year. Some are complaining that government debt is growing faster now than during the Korean financial crisis in 1997-98.
Critics who are worried about the nation's fiscal health argue that a sharp rise in government debt could once again erode investor confidence in Korea as it did in 1997, when panicked foreign lenders pulled money out of the country. This resulted in the financial crisis that devastated Korea and left deep social scars.
But the current buoyant Seoul stock market shows that Korea in 2020 is not the Korea of 1997. In the last 20 years, Korea has done much to strengthen its financial defenses, including reducing its exposure to foreign borrowing and improving its balance sheet.
Another worry is that more government spending will mean less financial reserves in the future to stimulate the economy and increase spending on social programs as the population ages. But Korea still has plenty of financial firepower left. Korea's debt to GDP ratio is 43.5 percent. This means that it would take less than half of a year's GDP to pay off the entire debt. In contrast, the average debt to GDP ratio for rich OECD countries (of which Korea is one) is 109 percent or slightly more than the annual GDP. In some countries it is higher, such as France (123 percent) and Japan (224 percent).
The fact that Korea's budgetary position is far less stretched than many of its Western peers makes it a more attractive place to invest. Moreover, Korea's current spending spree should be viewed as hopefully a temporary measure to bridge the effects of the economic disruption caused by COVID-19.
Nonetheless, more financial measures may be needed if the Korean economy faces persistent headwinds from weaker overseas demand for its products as the growth in the global economy slows due to COVID-19.
The overwhelming landslide victory in the National Assembly elections in April also gives President Moon Jae-in the opportunity and the parliamentary support to use the pandemic crisis to fulfill his goal of creating a more equitable economy. He has sought increased funding to create public jobs and provide job training in an effort to reduce structural unemployment, particularly among the nation's youth, as well as expand social infrastructure and welfare schemes.
Record low interest rates will help the government manage the deficit as it issues state bonds to help make up for revenue shortfalls. But the fall in interest rates also presents a political problem for Moon since they make mortgages cheaper and thus fuel increased demand for property and a resulting increase in prices.
Conservative economists who detest fiscal deficits might argue that Korea has embarked on a reckless spending spree, but the modern world has changed in some respects. There is a growing consensus among governments around the world that increased public spending is needed to overcome the economic consequences of COVID-19.
Both the government in Seoul and outside experts predict that the Korean economy could experience a strong V-shaped recovery next year. Even if export growth is not as strong as expected, increased government spending will boost the domestic economy and lay the foundation for restored fiscal soundness once global demand returns.
John Burton (johnburtonft@yahoo.com), a former Korea correspondent for the Financial Times, is a Washington, D.C.-based journalist and consultant.