Moon says preemptively expanding fiscal policies is inevitable in the COVID-19 economic fallout

Posted on : 2020-05-26 16:50 KST Modified on : 2020-05-26 16:50 KST
Blue House holds 2020 National Fiscal Strategy Meeting
South Korean President Moon Jae-in speaks during the 2020 National Fiscal Strategy Meeting at the Blue House on May 25. (Blue House photo pool)
South Korean President Moon Jae-in speaks during the 2020 National Fiscal Strategy Meeting at the Blue House on May 25. (Blue House photo pool)

South Korean President Moon Jae-in stressed the inevitability of active expansionary fiscal policies in remarks on May 25. His message was that the only means of preemptively responding to the economic crisis caused by the novel coronavirus is by committing as much of the government’s fiscal resources as possible. The administration plans to continue its expansionary fiscal approach through next year.

Presiding over the 2020 National Fiscal Strategy Meeting at the Blue House that day, Moon said, “In economic terms, this is a wartime situation.”

“When you’re putting out a fire, the only way to put it out quickly and avert greater damage is by using enough water in the early stages. We need to marshal all of the government’s fiscal resources toward establishing wartime finances,” he continued. The National Fiscal Strategy Meeting is the top decision-making body in fiscal terms, comprising the president, prime minister, and all Cabinet members. The meeting on May 25 was the 17th one, with the first one held in 2004.

Underlying Moon’s emphasis on the importance of expansionary fiscal policy that day was the understanding that the severity of the economic crisis caused by the virus has exceeded expectations. Indeed, the number of employed persons as of April was down by 470,000 from the same period last year -- the largest decline since the Asian financial crisis of 1997-98. A negative economic growth rate is seen as a certainty, while external uncertainties in terms of exports and other areas have been mounting as friction between the US and China has intensified. Moon likened fiscal spending by the state to a “seawall” and “vaccine” to protect against economic shocks and to “pump priming” to hasten economic recovery. After the meeting, Blue House Spokesperson Kang Min-seok explained, “The decision was made to lay the groundwork for a positive feedback loop where preemptive, proactive fiscal expansion prevents the economy from declining further and drives growth.”

“This proactive role for fiscal spending is to be maintained through next year,” he added.

There were also calls for the bold and swift development of a third supplementary budget.

“With the real economy shrinking in earnest in terms of employment and exports, there needs to be a role for a bolder fiscal approach,” Moon stressed before calling for the “swift development of a third supplementary budget that surpasses the first two.” His message called for a “super-budget” exceeding the scale of the first (11.7 trillion won, or US$9.47 billion) and second (12.2 trillion won, or US$9.88 billion). He also urged the National Assembly to complete the budget’s passage by the end of June -- stressing that this would be the only way to ensure the necessary money is provided in a timely manner where it is needed for livelihoods and the economy. The last time a third supplementary budget was implemented was in 1972.

Moon urges Finance Ministry to change approach to fiscal spending

Ministries dealing with the economy -- including the Ministry of Economy and Finance, where an emphasis on fiscal soundness predominates -- were urged to “shift their views on state fiscal spending.” Moon explained that the unprecedented economic crisis created by the pandemic requires “a longer-term positive feedback loop of fiscal investment, where adequate finances are applied to overcome the crisis and fiscal soundness is restored through a higher economic growth rate.”

A contrarian approach in policy terms, the idea is to boost domestic consumption and the economy through bold fiscal investment, leading to a rise in gross domestic product that helps restore fiscal soundness. Democratic Party leader Lee Hae-chan stressed the importance of the “social pact,” explaining that “we have an opportunity now to resolve structural issues.”

Moon also noted that South Korea’s state finances are “quite sound” compared to those of other countries. Indeed, the government debt ratio for South Korea after the first two supplementary budgets stands at 41%, which is lower than the 110% average among Organisation for Economic Co-operation and Development (OECD) countries. At the same time, he also clearly indicated plans to reduce the fiscal burden by keeping unnecessary or non-urgent expenditures to a minimum -- signaling that the government intends to lead the way in tightening its belt.

The issue of increasing taxes was not mentioned at the May 25 meeting.

“There wasn’t so much as a whisper about raising taxes,” one attendee said.

By Seong Yeon-cheol, staff reporter

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