|Deputy Prime Minister and Finance Minister Hong Nam-ki, right, speaks during press briefing at the Sejong Government Complex, May 29. Courtesy of Ministry of Economy and Finance|
The government presented a 35.3 trillion won ($28.9 billion) extraordinary budget draft today, drawn up to combat any economic collapse brought on by the COVID-19 pandemic.
The broad stimulus package seeks to provide firms with liquidity, bolster consumption and strengthen the country's social safety net. Also included is the first step of implementing a digitization- and green-related long-term vision for growth.
The largest extra budget to date and the third one set up in 2020 is well over the 28.4 trillion won drafted in 2009 following the global financial crisis and the 13.9 trillion won in 1998 amid the Asia financial meltdown.
"The measures will help the country overcome the virus-triggered crisis and lay the foundations for the creation of a new growth engine for the post-pandemic world," said Deputy Prime Minister and Finance Minister Hong Nam-ki. The Cabinet-approved plan will be submitted to the National Assembly today.
The plan is part of 270 trillion won in policy measures the government has undertaken so far to deal with the pandemic and its aftermath.
A third of the new budget, or 10.1 trillion won will be secured via expenditure reduction, with some 1.4 trillion won to be pulled from government-managed reserve funds. The remaining two-thirds will be financed by issuing debt.
Some 11.4 trillion won will be drawn via fiscal adjustment, reflecting the lowered growth outlook due to an expected shortfall in tax revenue amid the economic recession. The adjustment means the government plans to issue bonds to meet pre-set spending needs despite the shortfall.
This stems from the government revising its nominal growth rate for 2020 down to 0.6 percent from 3.4 percent made in July 2019, and follows the lowering of the real growth rate target from 2.4 percent to 0.1 percent. The bleaker outlook means lost tax revenue of 5.8 trillion won in corporate tax amid an industry-wide downturn, 4.1 trillion won in consumption-oriented value-added tax, 1.2 trillion won in earned income following massive layoffs and 1.1 trillion won in customs revenue due to a fall in exports.
Five trillion won of the remaining two-thirds of the budget, or 23.9 trillion won, will be spent on liquidity aid for businesses including financing small- and medium-sized enterprises (1.9 trillion won) and key major industries and large firms (3.1 trillion won).
Strengthening the social safety net will require 9.4 trillion won ― 8.9 trillion won will be used for state subsidies given to help firms pay workers on leave, job creation and unemployment benefit; while 500 billion won will be used to support low earners.
Some 5.1 trillion won will be used for the "New Korean Deal" in 2020, as part of a five-year plan that will need 76 trillion won. Of the 5.1 trillion won, digital and green initiatives will be allocated 2.7 billion won and 1.4 trillion won, respectively. About 1 trillion won will be used to strengthen the social safety net, while 2.5 trillion won will be used for anti-virus and disaster prevention measures.
A 20 billion-won fund will be set up to give subsidies to overseas firms reshoring to Korea, while 327.1 billion won will be allocated to the Korea Trade Insurance Corp., to help liquidity-strapped exporters. About 111.5 billion won was allocated to help private firms in the development of vaccines and treatments for COVID-19.
The record-high debt to be issued has raised fiscal soundness concerns, as the government debt-to-GDP ratio will climb to 43.5 percent, the highest figure to date.
Seoul National University economist Kim So-young said green and digital initiatives will help Korea identify long-term growth engines, but the rapid increase in government debt should be closely monitored.
"Fostering information technology will help enhance productivity and overall efficiency. The problem is spending on low-quality, temporary job creation ― welfare expenditure masked as a stimulus package. The government priority should be on how best to allocate taxpayers' money to quickly induce the desired outcome," he said.