Although the government is the only place to spend money... there are limits to growth through fiscal policy

Frozen Consumption and Investment Due to COVID-19
Exports Negative for 3 Consecutive Months
Local Finance Rapid Execution at 30.7% in March, 40.0% in April

[Asia Economy Reporter Jang Sehee] The government is emphasizing the speed of fiscal execution because, with private consumption and investment frozen due to the novel coronavirus infection (COVID-19), the only support left is the government. Exports, which account for 44% of the Gross Domestic Product (GDP), have also recorded negative growth for three consecutive months compared to the previous year. However, there are concerns that local government fiscal execution is also unable to pick up speed due to COVID-19, limiting the role of fiscal policy. Overemphasizing execution speed could lead to pouring taxes into the wrong places, resulting in wasteful public spending. Experts stress that rather than relying excessively on fiscal policy, it is important to raise the potential growth rate to prepare for the post-COVID-19 era.

◇ "Events canceled and construction disrupted" = According to data on rapid fiscal execution from 17 metropolitan cities and provinces provided by the Ministry of the Interior and Safety to Asia Economy on the 25th, the rapid execution rate of local government finances (17 cities/provinces and 226 counties/districts) stood at only 40.0% as of April. As of March, it was 30.7%, lagging behind the central government's fiscal execution rate of 35.3%. While the government emphasizes that the central government's fiscal execution rate recorded an all-time high in the first quarter, local government fiscal execution rates are failing to keep pace with the central government's speed.

The main reason local governments cannot accelerate fiscal execution is the significant impact of COVID-19. An official from a provincial government office said, "Due to COVID-19, events cannot be held, and on-site construction is difficult, so both domestic demand and investment projects are facing execution delays." Another local government official said, "In the case of construction and civil engineering social overhead capital (SOC) sectors, rapid execution requires disbursing funds before completion, but it is burdensome to provide money in advance when it is uncertain if problems may arise with contractors."

An official from a city hall said, "For the SOC sector, plans are made in January and February, contracts are signed in April and May, and full-scale execution begins in the second half of the year. During construction, complaints arise, and project changes are frequent, so investment execution is structurally low." Large-scale construction projects take a long time before groundbreaking due to negotiations for land acquisition, design, and various reviews.

There are also concerns about an illusion of execution. The official said, "For example, in Gyeonggi Province, once funds are sent down to cities and counties, it is considered executed, so there may be an illusion of actual execution. However, in single-system areas like Sejong and Jeju, there is nowhere to send funds down to, so they must execute everything themselves," expressing difficulties.

Due to the ongoing COVID-19 situation throughout the first half of this year, local government events have been consecutively canceled or scaled down. Changwon City decided to proceed with the 10th Citizens' Day ceremony as scheduled on July 1, but side events such as concerts have been postponed or canceled. Gyeonggi Province also canceled events like the '2020 Play Expo' and the 'Gyeonggi Provincial Government Spring Flower Festival.'

◇ "Government contribution already at a high level" = Experts point out that while releasing fiscal funds during a crisis like this can be somewhat helpful, there are limits to boosting economic growth rates. Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "During a recession, the fiscal multiplier is high, so government spending significantly raises GDP. Rapid execution can create demand and thus have a growth-boosting effect."

Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, "Looking at last year's economic growth rate, the government's contribution was 1.5 percentage points, accounting for three-quarters of the total. Given the government's already high contribution to growth, there are limits to growth through fiscal policy." He added, "Ultimately, raising the potential growth rate is important. Government budget projects are meaningful if they relate to increasing potential growth rates; otherwise, their effects will be limited."

The government maintains that in a situation where private sector vitality weakens due to the global economic slowdown caused by COVID-19, it is the government's responsibility to effectively supplement through fiscal policy. However, if even this proves difficult, the anticipated plus growth may become challenging. The government presented an economic growth forecast of 2.4% in its economic policy direction announced at the end of last year. It is expected to lower the growth forecast to the low 0% range in the economic policy direction for the second half of the year, to be announced in early June.

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