KDI "1st and 2nd Supplementary Budgets Drive GDP by 0.5 Percentage Points... Stimulus Effect Not Significant"

KDI Announces Economic Outlook and Current Issue Analysis for the First Half of 2020

[Asia Economy Reporter Kim Hyunjung] The Korea Development Institute (KDI) predicted that the government's first and second supplementary budgets, including the emergency disaster relief funds to respond to the COVID-19 pandemic, will boost the domestic economic growth rate by 0.5 percentage points.

KDI, a government-funded research institute under the Ministry of Strategy and Finance, published the "KDI Economic Outlook (First Half of 2020)" report on the 20th, stating, "The first and second supplementary budgets mostly consist of transfer payments to households and businesses, so the economic stimulus effect will not be significant, and it is considered to be aimed at strengthening the social safety net to overcome the disaster."

Jung Kyu-cheol, head of the Economic Outlook Office, explained at a prior press briefing, "The amount of the first and second supplementary budgets is 23.9 trillion won (11.7 trillion won for the first supplementary budget and 12.2 trillion won for the second), which is about 1.25% of the nominal GDP in 2019," adding, "For transfer payments, the fiscal multiplier is estimated between 0.2 and 0.5, and the multiplier for the first and second supplementary budgets is expected to be about 0.4, which is estimated to have raised GDP by 0.5 percentage points."

The fiscal multiplier is an indicator measuring the effect of government fiscal policy, showing how much the GDP increases when government spending increases by one won. KDI's estimate of a multiplier of 0.4 means that 1 trillion won of government spending is expected to increase GDP by 400 billion won. Jung added, "The economic situation at the time is very important when estimating the multiplier," and elaborated, "It depends on whether the spending is executed during an economic downturn and how many households currently lack liquidity."

On the same day, KDI projected Korea's GDP growth rates for this year and next year to be 0.2% and 3.9%, respectively; however, the third supplementary budget, which will be announced next month, was not reflected in these projections. Nevertheless, the forecast considered the assumption that the supplementary budget would be made at a level where the budget (revenue adjustment) situation would not deteriorate significantly. Additionally, it was assumed that the disaster relief funds paid to each household would be fully consumed by the deadline (August 31), and that donations would amount to zero won.

Jung said, "It is difficult to speculate without a concrete third supplementary budget plan, but if a large-scale supplementary budget is additionally implemented, it is reasonable to expect better numbers than the projected growth rates (0.2% this year and 3.9% next year)."

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