KDI advises expansionary policy for pump-priming
The Korea Development Institute (KDI) called for an expansionary fiscal policy and accommodative monetary operations Wednesday to help boost the sagging economy. The state-run think tank's remedy came based on its diagnosis that "the nation's business cycle might be nearing a trough."
Concerning the formulation of the "super budget" of 513.5 trillion won ($433.8 billion) for next year, the KDI said the government was going in the right direction. "We think the budget proponents have strengthened the role of fiscal spending to cope with shrinking demand both here and abroad," it said.
The institute's comments are in line with the government's position that fiscal spending should play the role of pump-priming when the private sector loses its vigor, although this may mean a larger budget deficit. The International Monetary Fund has also called for Korea to expand government spending. Still, the KDI report is drawing attention as it comes amid a sharp increase in the fiscal deficit this year, and the opposition parties' pledge to slash the proposed budget for 2020.
As suggested by the KDI, the government is right to decide to expand fiscal spending and ease its monetary policy. Still, it is necessary to check whether the budget planners have drawn up the expanded outlay in ways to maximize the spending efficiency. It is up to the National Assembly, which will scrutinize the budget bill.
If the government uses the budget to help revive the country's economic vigor, it can make efforts to prompt a virtuous cycle leading to recovery. If it spends taxpayers' money wastefully, however, the expanded budget can be like a poison for the economy. That shows why economic officials should be aware of the so-called crowding-out effect, in which inefficient use of fiscal means could dampen private sector investment.
The nation is in the middle of a demographic transition marked by the ultra-low birthrate and the world's fastest aging population. To ensure fiscal health under these circumstances, the government must gradually reduce the budget deficit for the long-term.
The Korea Development Institute (KDI) called for an expansionary fiscal policy and accommodative monetary operations Wednesday to help boost the sagging economy. The state-run think tank's remedy came based on its diagnosis that "the nation's business cycle might be nearing a trough."
Concerning the formulation of the "super budget" of 513.5 trillion won ($433.8 billion) for next year, the KDI said the government was going in the right direction. "We think the budget proponents have strengthened the role of fiscal spending to cope with shrinking demand both here and abroad," it said.
The institute's comments are in line with the government's position that fiscal spending should play the role of pump-priming when the private sector loses its vigor, although this may mean a larger budget deficit. The International Monetary Fund has also called for Korea to expand government spending. Still, the KDI report is drawing attention as it comes amid a sharp increase in the fiscal deficit this year, and the opposition parties' pledge to slash the proposed budget for 2020.
As suggested by the KDI, the government is right to decide to expand fiscal spending and ease its monetary policy. Still, it is necessary to check whether the budget planners have drawn up the expanded outlay in ways to maximize the spending efficiency. It is up to the National Assembly, which will scrutinize the budget bill.
If the government uses the budget to help revive the country's economic vigor, it can make efforts to prompt a virtuous cycle leading to recovery. If it spends taxpayers' money wastefully, however, the expanded budget can be like a poison for the economy. That shows why economic officials should be aware of the so-called crowding-out effect, in which inefficient use of fiscal means could dampen private sector investment.
The nation is in the middle of a demographic transition marked by the ultra-low birthrate and the world's fastest aging population. To ensure fiscal health under these circumstances, the government must gradually reduce the budget deficit for the long-term.
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