Lee's prepaid vouchers to spur consumption, may fuel inflation: experts

Onions and eggs are for sale at Hanaro Mart in Seoul's Seocho District, Friday. Yonhap

The Lee Jae Myung administration's decision to distribute prepaid vouchers to all citizens is expected to serve as a catalyst for boosting consumption at a time when sluggish domestic demand has been a major drag on Korea's economic growth, experts said Friday.

However, some warned that the impact may be short-lived and argued that the measure is not a fundamental solution for revitalizing the economy. Concerns were also raised over potential side effects, such as upward pressure on inflation.

The government approved a 30.5 trillion won ($22 billion) supplementary budget plan during a Cabinet meeting Thursday. As part of the plan, it allocated 13.2 trillion won — including 10.3 trillion won from the central government and 2.9 trillion won from local governments — to distribute prepaid vouchers, ranging from 150,000 won to 500,000 won per person, in a bid to breathe life into the sluggish domestic market.

This marks the second supplementary budget of the year and the first to be drawn up since Lee took office on June 4.

Professor Kim Dae-jong of Sejong University's School of Business said the prepaid voucher program is likely to have a significant impact, as domestic demand remains severely depressed and the country's GDP growth is forecast to slow to around 0.8 percent this year.

"Since the vouchers will be distributed to all citizens and are set to expire within a limited period — likely three to six months — they are expected to directly stimulate spending, particularly at local restaurants and supermarkets," Kim said.

He added that the program could be especially effective in Korea, where private consumption makes up only 30 to 40 percent of GDP, far lower than the United States' 70 percent.

"Korean consumers tend to save or hold back on spending. But the time limit on these vouchers should encourage immediate use, making the stimulative effect stronger," he said.

Kim also noted that the program comes at a critical time, following a six-month leadership vacuum caused by former President Yoon Suk Yeol's declaration of martial law and subsequent impeachment.

"This initiative is expected to provide a meaningful boost to domestic consumption," he said.

President Lee Jae Myung speaks during a Cabinet meeting at the presidential office in Seoul, Thursday. Yonhap

According to the government’s plan, the vouchers will be distributed based on income groups: 5.1 million people in the top 10 percent will receive 150,000 won, 43 million in the general population will get 250,000 won, 380,000 people in the lower-income bracket will receive 400,000 won and 2.7 million basic livelihood security recipients will receive 500,000 won.

The vouchers will be issued in two phases and will not be given as cash. Instead, they can be received in the form of regional gift certificates, prepaid cards or credit and debit cards. Detailed plans for distribution and usage will be finalized soon through a task force involving relevant government departments.

Jo Sang-hoon, a researcher at Shinhan Securities, highlighted that the large-scale voucher program is expected to boost overall consumer spending power, which will positively impact the retail industry as a whole.

"Domestic demand revival efforts and improved consumer confidence will enhance purchasing power," Jo said, citing Hyundai Department Store as his preferred stock.

While he estimated that the supplementary budget could raise economic growth by approximately 0.1 percentage points, he emphasized that this effect is "temporary."

"Fundamentally, sustainable growth must be driven by job creation," he said.

In addition, Lee Hyung-suk, a researcher at the Bank of Korea's Economic Research Institute, cautioned that the policy could trigger adverse effects such as rising inflation.

"Worsening fiscal health, increasing government debt and expansionary fiscal measures have had a significant impact on price increases," he said. "Fiscal policies implemented during deficit periods tend to provoke stronger inflationary pressures compared to those during surplus periods."