Professor Lee Jung-gu: "Government Finance, Whether Deficit or Not, Is Not Important... Productive Use Is Key"

Professor Lee Joon-gu, Department of Economics, Seoul National University. (Photo by Professor Lee Joon-gu's homepage)

[Sejong=Asia Economy Reporter Kim Hyun-jung] Professor Lee Joon-gu, Emeritus Professor of Economics at Seoul National University, stated that "the key is not whether the government budget runs a deficit or not, but whether the deficit spending was utilized in a productive manner," emphasizing the need for bold fiscal policies by the government. This is interpreted as advice in response to concerns raised both inside and outside the market that national fiscal soundness could be shaken due to recent emergency disaster relief payments amid the COVID-19 pandemic.

On the 22nd, Professor Lee wrote on his Facebook, "People trapped in the dogma of sound finance tend to condemn deficit spending itself as if it were the epitome of irresponsible fiscal management." He stressed, "Such dogmatic attitudes do not help solve the problems our economy is currently facing."

He particularly referred to the concept of 'functional finance' proposed by Keynes during the Great Depression of the 1930s, pointing out that maintaining sound finance regardless of economic conditions is a rigid way of thinking. Professor Lee said, "Depending on the situation, it is necessary to temporarily abandon sound finance and boldly utilize deficit spending," adding, "This is exactly the 'functional finance' Keynes proposed, arguing that to escape the trap of the Great Depression, the government must solve the problem of insufficient demand through bold increases in government spending, even if it means running deficits."

Regarding the ongoing debate over fiscal policies in response to COVID-19, he said, "It is by no means possible to solve all the problems our economy faces with expansionary fiscal policy alone," and added, "I do not object to the argument that more fundamental solutions are needed. However, it takes a lot of time to prepare fundamental solutions and for them to take effect."

Addressing concerns raised by some who prioritize fiscal soundness while pursuing fiscal expansion, he explained, "Those trapped in the dogma of sound finance fail to see reality properly," and noted, "As experience has shown, it is very difficult to escape a recession through monetary policy alone. Even international organizations like the IMF strongly recommend bold fiscal expansion."

He also mentioned that South Korea's national debt level is among the lowest in OECD countries and that the international credit rating agency S&P recently maintained South Korea's sovereign credit rating at AA, stating, "This can be seen as an assessment that we are still in a safe zone regarding national debt, so is there any need for us to already be scared and hesitant?"

Furthermore, he addressed the criticism that issuing government bonds is irresponsible because it increases the (tax) burden on future generations, saying, "If all additional government revenue from bond issuance is spent solely to increase the consumption of people currently living, then that criticism is valid. However, if additional government spending through bond issuance revitalizes the economy and results in higher incomes for future generations, the argument that the burden is passed on to future generations is not valid."

He added, "From the perspective of future generations, it would be more regrettable that the previous generation irresponsibly left the economy in recession due to being trapped in the dogma of sound finance," and concluded, "The best policy for future generations is to help the economy quickly escape the recession and embark on a smooth path of growth."

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