"Disaster Relief Funds Have Minimal GDP Impact... Only Advance Future Consumption"

Government to Inject 14.3 Trillion Won, Increasing GDP by at Most 7 Trillion Won
Last Year, Only 0.36% of South Korea's GDP

[Asia Economy Reporter Kim Eunbyeol] Although the use of emergency disaster relief funds distributed to the entire population has begun, economic experts unanimously agree that it is difficult to expect a significant economic stimulus effect from the emergency disaster relief funds. Compared to before the COVID-19 pandemic, it is true that the effect of fiscal spending has increased, but the fiscal multiplier effect, which absolutely increases the gross domestic product (GDP), is not expected to be large. The fiscal multiplier refers to the increase in GDP caused by an additional 1 won increase in the budget.

According to the Korea Institute of Public Finance on the 19th, the multiplier effect of the emergency disaster relief funds is expected to be larger than the generally predicted government transfer expenditure multiplier effect (about 0.2 to 0.3). Woo Jinhee, a team leader at the Korea Institute of Public Finance, said, "Generally, when calculating the multiplier, an average situation is assumed, but recently, due to the widespread income shocks caused by the COVID-19 pandemic, the marginal propensity to consume (the proportion of additional income that is consumed rather than saved) inevitably increases, so it is likely to appear higher than the usual fiscal multiplier." However, she added that it is difficult to mention a specific number because the fiscal multiplier has not been calculated reflecting the current situation yet.

Although there are differences depending on the research institution, the household transfer expenditure multiplier effect of the Korean government is generally considered to be about 0.2 to 0.3. This means that when 1 trillion won is invested, the GDP increases by about 200 billion to 300 billion won. Even if the multiplier effect is raised to about 0.5 considering that consumption was greatly contracted due to the COVID-19 pandemic, investing 14.3 trillion won in emergency disaster relief funds would increase the GDP by about 7.15 trillion won. This is about 0.36% of South Korea’s total GDP last year (1,914 trillion won).

Why is there little change in the total GDP despite distributing money to the entire population? Experts point out that people only brought forward their future spending with the money received from the government, rather than increasing additional consumption. If a citizen who received the emergency disaster relief fund buys new glasses or goes to a hair salon, consumption will increase in the short term, but annually, consumption will not increase additionally after the usage period of the emergency disaster relief fund ends. A Bank of Korea official also said, "Although the Bank of Korea does not calculate the fiscal multiplier, it is expected to be higher than the usual multiplier effect," but added, "The problem is that people only bring forward consumption and do not spend additional personal money."

The Bank of Korea plans to include part of the emergency disaster relief fund usage amount in the second quarter GDP. The amounts charged to credit and debit cards and gift certificates given to the general public with a set deadline will be recorded in the second quarter GDP. Since the government set a deadline and spent money to promote consumption, it can be treated as 'government consumption' in GDP or as transfer expenditure and counted as 'private consumption.' If treated as government consumption, the government's contribution to GDP increases.

Meanwhile, there are also forecasts that the fiscal multiplier effect may be lower than expected. Cho Jangok, a professor of economics at Sogang University, said, "About 60 to 70% of the entire population will spend the money they received first, and if it is insufficient, they will consume their own money, but they will not increase consumption additionally," adding, "In the case of the United States, the fiscal multiplier is measured to be about 0.5, so South Korea’s fiscal multiplier effect will be much lower." She continued, "However, since the money goes to small business owners, it has the effect of easing their financial difficulties," and added, "If more support had been given to small business owners, the multiplier effect would have been greater."

This content was produced with the assistance of AI translation services.