Warning from National Research Institute: "Government Should Be Cautious with Additional Fiscal Spending"

KDI, Economic Outlook

On the 21st, Jeong Gyu-cheol, Director of Economic Outlook at KDI (right), and Jo Deok-sang, KDI Research Fellow, are explaining the economic outlook at the Government Complex Sejong.

[Sejong= Asia Economy Reporter Joo Sang-don] "Fiscal policy should actively respond to the negative impacts of the novel coronavirus disease (COVID-19), but the scale and composition of additional fiscal spending should be carefully determined according to changes in the future economic situation."

A warning from a national research institute regarding the government's fiscal policy has emerged. This is due to concerns that the recent rapid increase in fiscal deficits will pose a burden on fiscal soundness in the future.

On the 20th, the Korea Development Institute (KDI) made this suggestion to the government through its Economic Outlook (first half of 2020).

Jo Deok-sang, a KDI research fellow, emphasized, "It is necessary to promptly complete the execution of the first supplementary budget of 11.7 trillion won and the second supplementary budget of 12.2 trillion won, which have already been confirmed and are being implemented," adding, "Considering the high uncertainty, additional fiscal spending should be actively considered if necessary, but any increase in spending that could become entrenched in the long term requires careful review beforehand."

Given the persistent uncertainties such as the global economic downturn and the possibility of further spread of COVID-19, while fiscal policy needs to actively respond depending on future health and economic conditions, if additional fiscal spending is required within the year, it should be focused on temporary and reversible expenditures. For projects likely to become entrenched in the medium to long term, it is advisable to secure fiscal revenue to cover the spending and discuss it later in the main budget. Furthermore, due to the deterioration of corporate performance since last year and the negative impact of COVID-19 spread, national tax revenues this year are expected to fall significantly short of budget plans, so it is necessary to adjust revenue budgets to ensure smooth execution of planned fiscal spending within the year.

The third supplementary budget is considered inevitable. Jeong Gyu-cheol, head of KDI’s Economic Outlook Office, explained, "Since some revenue adjustments are necessary, the third supplementary budget is unavoidable," adding, "As for the fourth and fifth supplementary budgets, it is better not to decide immediately but to determine their necessity depending on how the COVID-19 spread progresses."

Welfare was cited as a 'long-term and irreversible expenditure.' Jeong said, "Most social overhead capital (SOC) policies are projects that end after a certain period," and "On the other hand, welfare spending, once started, is difficult to retract, although not impossible."

KDI expects fiscal spending to increase significantly with the confirmation of two supplementary budgets, projecting that fiscal deficits and national debt at the end of this year will greatly exceed the main budget plans. According to the Ministry of Economy and Finance, the debt ratio reflecting only the burden of national bond issuance from the first supplementary budget will rise to 41.2% by the end of this year. Including the second and third supplementary budgets (assuming 30 trillion won), the debt ratio will increase to 42.9%. This means the ratio will surge by 5.8 percentage points within a year.

Research fellow Jo stated, "It is necessary to secure trust from the private sector and the international community regarding fiscal soundness by clarifying that the short-term spending increase and tax burden relief for COVID-19 response will be complemented by spending cuts and normalization of tax burdens after economic recovery," adding, "In the medium to long term, to ensure fiscal sustainability, it is necessary to control the pace of expenditure growth as much as possible through strategic expenditure restructuring while simultaneously seeking policy alternatives to supplement fiscal revenue."

KDI also suggested creating conditions for corporate restructuring based on employment safety nets in the future. After the COVID-19 crisis, new promising industries and declining industries will emerge, and the government should focus its policy capabilities on regulatory reform and infrastructure development related to these. Additionally, for resources to be allocated to new industries, conditions must be created for companies in declining industries to exit smoothly, which requires expanding social safety nets such as eliminating employment blind spots and supporting the unemployed.

The necessity of tax increases was also mentioned. Jeong said, "Although it is difficult now because the economy is not good, considering the medium to long term, welfare demand is expected to expand significantly, so fiscal revenue should increase accordingly to meet the demand for expanded fiscal spending," adding, "In the medium to long term, tax increases will be necessary, so I think it is time to start related discussions."

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