Korean Economic Association Seminar "Government Spending May Be Less Effective in the COVID-19 Era"

The Effect of Previous Expenditures Like Disaster Relief Funds May Be Particularly Small

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] Although large-scale monetary easing and fiscal spending are being carried out internationally to overcome the shock of the novel coronavirus infection (COVID-19) spread, opinions have emerged that the effects may vary depending on the method. In particular, the surge in transfer payments such as disaster relief funds may have little effect in terms of economic revitalization.

At the seminar "The Role of Fiscal Policy for Enhancing Growth Potential and Improving Distribution" held by the Korean Economic Association on the 20th, Professor Kim Soyoung of Seoul National University announced, "As a result of an empirical analysis of the effects of Korea's fiscal policy, it was found to have a significant impact on gross domestic product (GDP)," but noted that during the COVID-19 situation, the fiscal multiplier of government spending may be lower than usual.

The fiscal multiplier is an indicator showing the correlation between government spending and the increase in GDP. Professor Kim estimated the fiscal multiplier one year after fiscal spending to be around 0.6 to 0.7. This means that if the government spends 1 trillion won, the GDP increases by only 600 billion to 700 billion won.

She pointed out that especially during the COVID-19 situation, since economic activities are restricted, the effect of government fiscal spending may not be greater than usual. Professor Kim emphasized that the effect of transfer payments such as disaster relief funds is particularly unclear. Analyzing the fiscal multiplier effects by type of existing government spending, government consumption expenditure had a large short-term effect, investment expenditure amplified the multiplier effect in the long term, but transfer payments showed no significant effect.

She said, "Since the multiplier of transfer payments is usually quite small or not significantly measured, using transfer payments for economic revitalization should be reconsidered." She added that careful review is necessary when allocating additional disaster relief funds.

There was also criticism that government bond issuance could have adverse effects on the national economy in the long term. Since taxes can have negative effects on the economy simply by being collected, their short-term effectiveness may be reduced, but government bond issuance can burden the country and cause problems.

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