'Reform more crucial than extra budget'

By Yoon Ja-young

The government is set to inject a 22 trillion won ($19.6 bil.) stimulus package including an 11.8 trillion won supplementary budget to sustain the faltering economy, but concern is mounting that this will merely patch up the problem.

Critics say the government should admit that the economy has entered an era of low growth and focus on structural reform and seek new growth engines instead.

“It was somewhat inevitable for the government to seek fiscal stimulus through a supplementary budget,” said Lee Geun-tae, an economist at LG Economic Research Institute, pointing out how the outbreak of Middle East Respiratory Syndrome (MERS) damaged consumption.

With some economic think tanks estimating that the economic loss from the outbreak could amount to 20 trillion won, the government set the fiscal package which it hopes will pull up the economic growth rate by 0.3 percentage points, helping the country achieve the 3.1 percent economic growth rate predicted by the government.

The economist, however, stressed that the supplementary budget should not aim to achieve over 3 percent economic growth, saying that the recent slowdown of growth is a structural problem rather than a temporary phenomenon.

He explained that the growth engine of the global economy has made a structural shift, from manufacturing and trade to service and domestic consumption. As a result, it has become difficult for exports to lead Korea’s economic growth.

“With the high productivity in the manufacturing sector having less impact and the aging society leading to a decrease in the working population, the economy is expected to enter an era of below 3 percent growth,” Lee said.

He warned that increasing fiscal spending to achieve the economic growth rate is only likely to increase the state debt, while failing to enhance growth.

“There should be a reevaluation of our growth potential and the long-term plan for fiscal soundness.”

Kim Yu-mi, an economist at BNK Securities, said the market should lower expectations on the effect of the supplementary budget.

“For the short term, the supplementary budget will help sustain growth and give recovery in the third quarter. However, its impact will not be as notable as in the past,” she said.

She pointed out that the government has been setting a supplementary budget every two years since 2005.

“Due to burdens following the supplementary budget, the government couldn’t continue with its expansionary fiscal policies, which led to economic recession. It ended up setting another supplementary budget after two years,” she said. She added that the huge supplementary budget in 2009 helped the economy record a 6.5 percent growth rate in 2010, but the growth rate soon plunged to 3.7 percent in 2011 and to 2.3 percent in 2012.

Some lawmakers of the governing Saenuri Party are also showing concern that the government is not looking into the fundamentals.

“It would be okay if the extra budget aimed at changing the economic structure. However, it is being used as a short-term stimulus measure,” said Rep. Lee Hahn-koo of Saenuri Party in a radio interview with KBS.

“It is likely to decrease motivation for structural reform or even hamper reform, which is more crucial than achieving the economic growth rate,” he said.