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(News Focus) Bigger fiscal role eyed for post-pandemic economic recovery in 2021

All News 08:30 September 01, 2020

SEJONG, Sept. 1 (Yonhap) -- The 2021 fiscal spending proposal plan underscores a firm stance by the government that fiscal policy should play a bigger role in the nation's economic recovery from the coronavirus pandemic and job creation.

The government's budget for next year calls for a 8.5-percent on-year rise in spending to 555.8 trillion won (US$469.8 billion).

The increase is based on forecasts that total state revenue will rise 0.3 percent next year to 483 trillion won and tax earnings will fall 3.1 percent to 282.8 trillion won in 2021 as the pandemic hit earnings from corporate tax.

Next year's budget spending also heralds a greater fiscal role in South Korea's economy, which is reeling from an unprecedented impact from the pandemic.

South Korea's economy slid into recession for the first time since 2003 as exports plunged due to the pandemic.

According to the Bank of Korea, the nation's gross domestic product contracted 3.3 percent in the second quarter from the first quarter, when it shrank 1.3 percent. Exports fell 16.6 percent in the second quarter, marking the sharpest contraction since 1963.

"Our fiscal policy has played the role of a strong prop for the nation's economy to timely cope with a crisis," Finance Minister Hong Nam-ki told reporters, citing three rounds of extra budget worth 59 trillion won this year to help cushion the economic impact of the virus.

Finance Minister Hong Nam-ki (C) speaks during the 15th emergency meeting of economy-related ministers at the government complex in Seoul on Aug. 27, 2020, to tackle economic issues amid the pandemic. (Yonhap)

The fiscal deficit is estimated to reach 5.4 percent of the country's GDP next year, up 1.9 percentage points from 3.5 percent set for 2020, while the ratio of national debt to GDP will rise 6.9 percentage points to 46.7 percent in 2021.

Hong admitted that fiscal soundness "will be somewhat weakened," but fiscal policy should play an active role for the economy to swiftly recover from a wartime situation, like this pandemic.

The expansionary fiscal policy, among other things, is clearly aimed at pushing for Korean New Deal projects to boost economic growth after the pandemic wanes.

In July, the government said it will invest 160 trillion won by 2025 under the bold stimulus package that will create 1.9 million jobs and kick-start the coronavirus-hit economy.

Unlike conventional infrastructure projects, the deals feature 28 projects that will transform the nation's fossil fuel-reliant economy into an eco-friendly one and increase state investment in artificial intelligence and fifth-generation (5G) telecommunication services.

The projects are aimed at laying the groundwork for economic growth in the long term, while cushioning the economic blow from the pandemic and hastening an economic recovery.

A total of 21.3 trillion won was earmarked for the projects next year and such projects are expected to create 360,000 jobs, ministry officials said.

Under the budget proposal, another 8.6 trillion won will be spent to create or protect two million jobs, according to the ministry.

The bulk of the 2021 budget will go to the health, welfare and labor sectors, with the total allocated hitting a record 199.9 trillion won.

In order to boost innovative growth, over 27 trillion won will be spent on research and development. In particular, some 8 trillion won will be earmarked to boost the so-called green economy.

A street lined with restaurants is nearly empty during lunchtime in Seoul's Seodaemun Ward on Aug. 28, 2020, as fewer people go out for lunch amid the coronavirus pandemic. (Yonhap)

The expansionary fiscal policy has raised concerns that the country's fiscal deficit will widen in the coming years if the planned spending does not bring about higher economic growth.

The finance ministry said it put more focus on fiscal expansion next year but secured fiscal soundness at the same time by carrying out fiscal restructuring.

Hong said the government review the need to draw up the fourth extra budget this year if the nation raises social distancing rules to the highest level amid a resurgence of the new coronavirus.

With daily virus infections surging to triple digits, South Korea raised the virus curbs to Level 2 in the three-tier system earlier last month, banning indoor meetings of 50 or more people.

There have been growing calls for implementing the Level 3 rules, under which gatherings of 10 or more people, in-person classes at schools and sports events will be prohibited.

Whether to raise the distancing rules to Level 3 will be a "big variable" as the government considers drawing up a fourth extra budget, Hong said.

"If social distancing rules are raised to Level 3, the economic impact will become more serious," Hong said.


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