By Yoon Ja-young
The hurriedly announced package of stimulus steps is unlikely to give a substantial boost to the economy as it is lacking in details, economists said Friday.
They said one big uncertainty about the latest pump-priming is exactly how much the government will secure for the supplementary budget out of the 15 trillion won in total fiscal spending pledges it made.
It faces an uphill battle to get approval for the supplementary budget at the National Assembly. At the same time, falling tax revenue will also restrict the government from aggressively spending tax money, they said.
The spread of Middle East Respiratory Syndrome (MERS) prompted the government to set a supplementary budget to prevent the economy from further losing steam, but many economists doubt whether it will be effective.
The government revealed the fiscal stimulus, Thursday, aiming to sustain this year’s economic growth rate at more than 3 percent. It includes setting a supplementary budget.
However, analysts point out that the government has not come up with concrete plans.
“The government said it will use over 15 trillion won as a fiscal stimulus, including setting a supplementary budget, but it lacked details, such as the size of the supplementary budget or where it will be spent,” said Lee Ji-hyung, an economist at HMC Investment and Securities.
The finance ministry said that the details of the budget will be determined next month after consultation with the governing party, and then submitted to the National Assembly for approval. As the government doesn’t have much time, the plan is likely to be hastily prepared.
It is also doubtful whether it will be big enough to make an impact, as the government will have to resort to bonds to fund it.
Back in 2013, the government issued 15.8 trillion won in bonds to fund a 17.3 trillion won supplementary budget. Strategy and Finance Minister Choi Kyung-hwan said it will be inevitable that bonds will be issued this time, but lawmakers are concerned over increasing debt.
The government debt could near 600 trillion won with the issuance of the bonds.
The ruling Saenuri Party floor leader Yoo Seung-min made it clear that state debt and fiscal soundness should be taken into account in setting the supplementary budget.
Analysts also fear that even if the 15 trillion won is set for the latter half of the year, it is likely to be spent mostly to make up for the tax shortfall.
The government sets a budget for next year each year, but it can set supplementary budget if tax revenue falls short of expectations or there is a need for unexpected tax spending.
If the supplementary budget is set for tax spending, it will help boost the economy as the government will be spending money on diverse projects.
Lee pointed out that the government has been failing to collect as much tax as it forecasts each year.
“When taking this into account, the shortfall in tax revenue can amount to between 4 and 16 trillion won this year.”
He said the whole supplementary budget might have to be spent to make up for the shortfall in the worst case.
“It is difficult to expect that the government will be able to pull up economic growth through fiscal measures in the latter half of the year,” he said.
He stressed that the government should prepare measures to boost consumption. “It may help warm up consumer sentiment which has cooled due to MERS.”
Lee Sang-jae, an economist at Eugene Investment and Securities, agrees that the amount of the supplementary budget allocated for tax spending will matter.
“The government suggested over 15 trillion won will be used for the fiscal stimulus, but it includes not only the supplementary budget but also the investment by diverse funds and government-run enterprises. Currently, we know neither the size of the supplementary budget nor how much will be allocated for tax spending.”
He said the supplementary budget should be at least 12 trillion won to effectively fight the negative impact of MERS on the economy.