[The Editors' Verdict] The First Year of Post-COVID-19... Spotlight on Medium-Term Fiscal Management

[Asia Economy Reporter Choi Il-gwon] If the government’s expected vaccine rollout begins next month, the ‘post-COVID-19’ era will come into view. The hope of returning to everyday life is growing stronger.

However, it seems difficult for government finances to escape the midst of the novel coronavirus disease (COVID-19) crisis. Rather than focusing on fiscal soundness, the emphasis appears to be on injecting more funds to revive the economy. By November of last year, the government’s fiscal deficit had nearly reached 100 trillion won, and if the government actively responds to the economic downturn, the deficit is likely to increase further.

The government’s continued commitment to fiscal spending was evident in a recent meeting hosted by the Ministry of Economy and Finance. The ministry invited private experts to discuss the management of national finances over the next five years. Considering this year as the first year of the post-COVID-19 era, the government’s medium-term fiscal policy is significant as it serves as a starting point to redefine the role of fiscal policy.

The meeting was conducted as a brainstorming session to set directions. Given that most opinions focused on expenditure areas such as industry and welfare, it was not a forum aimed at ensuring fiscal soundness. The statement by the ministry’s vice minister calling this year the ‘year of overcoming crisis and economic rebound’ suggested that the focus was more on how to spend funds rather than securing ‘ammunition’.

Considering the rapid increase in national debt, concerns that ‘too much emphasis is being placed on fiscal spending’ are not unfounded. However, it is necessary to take into account that the COVID-19 crisis is ongoing worldwide and that economic recovery fueled by fiscal stimulus is far from fading. It is not easy for South Korea to take the lead in maintaining fiscal soundness compared to other countries.

During this crisis, fiscal responses by countries around the world have become bolder than in the past. They are more actively committed to the goal of economic recovery, reflecting lessons learned from mistakes made during the response to the 2008 global financial crisis. The European Union (EU) injected funds to respond to the global financial crisis but soon pursued policies to withdraw funds due to concerns about fiscal deterioration. This led to the 2011 fiscal crisis in Southern Europe, and the European economy, which had shown signs of recovery, collapsed again. Because of this, the EU has continuously conveyed the message since the outbreak of COVID-19 that “fiscal policy must actively respond until the economy recovers.” The EU has also temporarily suspended its fiscal rule obligation to maintain deficits below 3% of gross domestic product (GDP). This reflects the urgency of injecting budgets to revive the economy.

Fiscal spending seems inevitable until the COVID-19 crisis is fully overcome. However, clear principles must be observed. The fundamental principle is that fiscal policy should act as a catalyst to revive the economy. Fiscal resources should be directed to areas with high multiplier effects to induce virtuous cycles and support vulnerable groups to realize welfare?this is ultimately the basic and core role of fiscal policy.

However, the direction of fiscal execution decisions by the government and political circles is different. The budget for the third round of disaster relief payments exceeded three times the original amount due to expanded eligibility, and calls to provide the fourth round of disaster relief payments to the entire population are spreading more strongly than expected. When the political circles push, the government tends to follow. Although there is a principle to use fiscal resources prudently, the reality is different.

This year’s fiscal spending is important as it will gauge the direction of medium-term fiscal management. The choices made in one year stand at a point that will determine the next five years.