KDI "82 Trillion Won Spent on COVID-19 Response, Driving GDP by 0.8%p"

"Lack of Government Effort for Medium-Term Fiscal Normalization"

[Sejong=Asia Economy Reporter Kim Hyunjung] An analysis has emerged that the government's fiscal expenditure of 82 trillion won to respond to COVID-19 raised the economic growth rate by 0.8 percentage points last year and this year. While the scale of fiscal response last year was considered reasonable given the spread of COVID-19, efforts toward medium-term fiscal normalization were deemed insufficient. In particular, there is an opinion that it is necessary to persuade the public about the need for tax increases.

Heo Jinwook, head of the economic forecasting model at the Korea Development Institute (KDI), explained in a report titled "Evaluation and Implications of Fiscal Economic Response during the COVID-19 Crisis" on the 29th, "The effect of increasing the economic growth rate due to the 1st to 4th supplementary budgets (supplementary budgets) last year and the 1st supplementary budget this year is expected to be 0.5 percentage points and 0.3 percentage points, respectively." The effect of economic growth rate (GDP) increase per 1 won of additional fiscal expenditure was estimated to be 0.2 to 0.3 won.

The government provided nationwide disaster relief funds last year, new hope funds for small business owners, and employment retention and stabilization support funds for vulnerable employment groups. It is judged that the effect of these supports continued until this year and contributed to economic growth through additional disaster relief payments this year. The government previously prepared supplementary budgets totaling 81.7 trillion won, with four rounds last year (totaling 66.8 trillion won) and one round this year (14.9 trillion won) in response to the spread of COVID-19.

By the number of supplementary budgets, the 3rd supplementary budget last year, amounting to 35.1 trillion won (23.7 trillion won in expenditures + 11.4 trillion won in revenue adjustments), had the largest effect on increasing the economic growth rate by 0.2 percentage points. The effects of the 1st, 2nd, and 4th supplementary budgets last year and the 1st supplementary budget this year on economic growth were all the same at 0.1 percentage points. Heo explained, "The 3rd supplementary budget last year reflected many investment characteristics such as the Green and Digital New Deals, which relatively increased the multiplier effect."

He further diagnosed that the scale of fiscal policy for COVID-19 response itself was relatively small compared to major countries. According to the International Monetary Fund (IMF) data, the size of additional fiscal responses last year in major advanced countries greatly exceeded 10% of GDP. The United States had the largest fiscal expenditure at 16.7% of GDP, followed by the United Kingdom (16.3%), Australia (16.1%), Japan (15.5%), Canada (14.6%), and Germany (11.0%). South Korea stood at 3.4% of GDP, similar to Argentina (3.8%) and India (3.1%).

KDI evaluated that considering that the spread of COVID-19 was prominent in major advanced countries but relatively well controlled in South Korea and the economic shock was relatively small, the scale of fiscal response was reasonable.

However, it was viewed that additional efforts are needed to normalize the expanded role of fiscal policy after COVID-19. This is interpreted as a criticism that a clear 'fiscal exit strategy' has not been formulated.

Heo pointed out, "Despite economic recovery, the medium-term fiscal plan is expected to continue large fiscal deficits, indicating that economic forecasts have not been sufficiently reflected in the fiscal plan," adding, "While major countries generally plan to gradually reduce the recently surged fiscal deficits over the next 4 to 5 years, South Korea plans to sustain large fiscal deficits and a steep increase in national debt even in the medium term."

He also emphasized, "Although the short-term need for fiscal expenditure in South Korea is decreasing, structural fiscal expenditures such as welfare are likely to become entrenched," and "Therefore, caution is needed when increasing fiscal spending, along with efforts to secure revenue sources and the necessity of medium- to long-term tax increases." He added, "Efforts to gain public understanding of the need for tax increases should be reflected in the government's fiscal plans."

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