Caution needed to preserve fiscal room to cope with full range of virus-caused difficulties
In its latest measure to cushion the impact of the novel coronavirus crisis, President Moon Jae-in's administration on Monday decided to grant what it called emergency disaster relief money to households in the bottom 70 percent income bracket.
A total of 14 million households that comprise 35 million people in a country with a population of 51 million are expected to benefit from the relief program.
Under the plan, 1 million won ($820) would be doled out to each household with four or more members in the middle- and low-income range, with the payment being scaled down gradually for households with three or less members.
Unveiling the relief scheme during a third meeting of the emergency economic council, Moon said that people deserve "compensation" for their difficulties observing the social distancing guideline and other quarantine steps.
According to estimates from the Ministry of Economy and Finance, it will cost 9.1 trillion won to finance the program. Finance Minister Hong Nam-ki, who doubles as deputy prime minister for economic affairs, told reporters after the council meeting that the government would draw up an extra budget worth 7.1 trillion won to help fund it.
Critics note the relief package goes against the principle of using limited financial resources in the most efficient way based on economic logic.
The Finance Ministry initially proposed doling out the relief money to households whose income stands at or below the median income. The number of households in this income bracket is about 10 million.
But the ruling Democratic Party of Korea and presidential aides pressured the ministry into expanding the scope of recipients to include households that earn between 100 percent and 150 percent of the median income.
Households earning more than the median income will most likely refrain from spending more than essential expenditures amid growing concerns over the prolonged economic slump.
The government plans to provide the relief aid in the form of shopping coupons and gift certificates instead of cash, intent to stimulate consumption spending. But this would still lead most middle-income families to reduce the expenditure they might otherwise have made.
It is more desirable to provide a larger sum of relief money to those left more vulnerable to the economic impact of the coronavirus pandemic, including small business owners and nonregular and daily workers. Concentrating financial support on low-income households would be more effective in helping boost the economy by promoting consumption spending.
The ruling party and the presidential office apparently hoped that expanding the scope of beneficiaries from the relief package would help forge more favorable voter sentiment ahead of the April 15 general election. President Moon said Monday his government would submit the proposed extra budget bill to the parliament shortly after the election.
What is worrying is that massive spending under the Moon government may hurt the country's long-term fiscal soundness.
The envisioned extra budget comes just two weeks after the National Assembly passed an 11.7 trillion-won supplementary budget aimed at helping fight the spreading coronavirus and minimizing its negative impact on the economy.
Finance Minister Hong said a large part of the proposed extra budget would be funded by readjusting existing fiscal spending plans, but he still conceded it might be necessary to issue more state bonds.
The government has already decided to issue 60 trillion won worth of state bonds to help finance the regular budget for 2020 set at 512 trillion won and sell another 10.3 trillion won worth of state bonds to cover the supplementary budget approved by the parliament last month.
Korea's national debt is estimated to reach a record high of 820 trillion won this year, with its proportion of the country's gross domestic product exceeding 40 percent -- a level that has been considered a "psychological Maginot Line."
It is certainly important and necessary to expand government spending to help people go through increasing hardships caused by the coronavirus outbreak. Still, caution needs to be taken to preserve fiscal room to cope with massive unemployment, liquidity crunches and other challenges that will face the nation down the road.
The sharp rise in the national debt-to-GDP ratio could lead global rating agencies to lower the country's sovereign credit rating. Massive issuance of state bonds might result in reducing demand for corporate bonds.
Bolder and more serious consideration should be given to readjusting spending items of the regular budget, which includes 180 trillion won in welfare expenditure, to secure anti-virus funding without resorting to issuing more debt.
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