President Moon Jae-in’s administration has proposed an extra budget worth 11.7 trillion won ($9.86 billion) to help deal with the mass outbreak of the novel coronavirus here and minimize its impact on the economy.
The supplementary budget bill, which was submitted to the parliament for approval Thursday, is the country’s largest-ever spending plan for handling the fallout from an infectious disease. In 2003, South Korea set aside 4.2 trillion won in additional fiscal expenditure in the wake of the SARS outbreak and 11.6 trillion won in 2015 to fight the MERS epidemic.
It is necessary for the National Assembly to pass the extra budget bill as soon as possible before its ongoing session ends on March 17 to support the anti-virus fight and ease deepening economic woes.
Still, the additional spending plan is far from sufficient to shore up Korea’s faltering economy, which had already been slowing down before being hit by the rapid spread of COVID-19 that emerged in China last December.
The Bank of Korea slashed its growth outlook for this year from 2.3 percent at the outset of the year to 2.1 percent last week, about a month after the country reported its first confirmed case of the respiratory disease on Jan. 20. Many international investment banks and local research institutes now forecast Asia’s fourth-largest economy would grow below 1 percent in 2020.
A bulk of the proposed extra budget has been allocated to strengthen the quarantine system, support the less-privileged, bolster employment and keep struggling small business owners afloat.
About 2 trillion won will be spent to boost domestic consumption. The government plans to provide gift vouchers to low-income workers and elderly people, while offering a 10 percent refund on the purchase of energy-efficient home appliances.
These and other measures designed to promote consumption spending can hardly be expected to give a significant boost to the floundering economy.
The government needs to go beyond resorting to more fiscal spending to revitalize the economy in the long term. It should carry out sweeping deregulation, make the labor market more flexible and cut taxes to encourage corporate investment.
Moon and his aides should ditch the income-led growth policy backed by a string of pro-labor measures, including sharp minimum wage hikes, which have prodded companies to reduce investment and employment at home and move production abroad to cope with rising costs.
Attesting to the failure of the misplaced policy implemented since Moon took office in 2017, recent data from the central bank showed Korea’s per capita gross national income decreased 4.1 percent from a year earlier to $32,047 last year.
Economic woes aggravated by the spread of the epidemic should prompt the Moon administration to abandon its economic approach that has proved wrong.
It is worrying that the country’s fiscal soundness has been deteriorating at an alarming pace under the Moon administration.
The latest and fourth extra budget it has proposed comes on the top of a record annual budget of 512.5 trillion won set for this year.
The Ministry of Economy and Finance plans to issue 10.3 trillion won worth of state bonds to finance the additional expenditure with the remaining 1.4 trillion won to be covered by leftover funds.
The deficit of the managed fiscal balance -- the shortfall in the government’s income compared with its spending, excluding social security funds -- is forecast to soar to 82 trillion won, or 4.1 percent of the country’s gross domestic product, this year, the largest proportion since 1998.
Accumulated national debt is projected to rise to 815.5 trillion won in 2020, accounting for 41.2 percent of GDP, the highest figure on record.
Fiscal imbalance is likely to worsen further if the government draws up additional extra budgets in the second half of the year if the coronavirus continues to spread and the economy remains sluggish.
Financial authorities should also be prepared to take steps to stabilize the local capital market if necessary.
Offshore investors sold a net $3 billion worth of Korean stocks in February, compared with net selling of $165 million a month earlier. Korea suffered the third largest foreign selloff last month amid global capital flights to safer assets, followed by Brazil at $4.24 billion and Taiwan at $3.57 billion. So far this month, foreign investors have been in net selling mode in local bourses.
The government needs to step up efforts to restore the currency swap line with the US and Japan and expand the scheme with other major economies.