[Weekly Review] 'Self-Employed Loss Compensation' Gains Momentum... Fiscal Deficit Concerns Shake the Bond Market

Deputy Prime Minister Hong Nam-ki: 'Fiscal Conditions and Funding Environment Must Also Be Considered' Even in the First Half of the Year
Ruling Party Proposes 24 Trillion Won Monthly Plan
Funding Through Bank of Korea's Government Bond Purchases?... Government Bond Yields Surge

On the 14th, in front of the Democratic Party of Korea headquarters in Yeouido, Seoul, representatives from gyms and Pilates studios, study cafes, screen golf, and coin karaoke rooms announced the three major joint demands of self-employed business owners regarding the adjustment of business closure restrictions scheduled to be announced on the 16th. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Eunbyeol Kim] Prime Minister Jeong Sye-kyun has officially announced the review of compensation measures for sales losses of small business owners and self-employed individuals despite the Ministry of Economy and Finance's negative stance, accelerating the momentum for the 'Self-Employed Loss Compensation System.' The ruling party has been flooding various bills just one day after Prime Minister Jeong's remarks. Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki opposed the plan, citing the need to consider fiscal conditions and financial resources, but neither Prime Minister Jeong nor the Democratic Party has issued an official response to Hong's statements.

Implementing the self-employed loss compensation system ultimately requires large-scale government bond issuance. Consequently, concerns over supply and demand in the government bond market have caused interest rates to surge across the board. There are also worries that the rise in market interest rates could diminish the effect of the Bank of Korea's reduction of the base interest rate to 0.5% in response to the COVID-19 pandemic. This is an example of the crowding-out effect (where increased government bond issuance pushes up market interest rates, thereby suppressing private consumption and investment activities).

As the government forcibly restricted business operations during COVID-19 quarantine measures, there are arguments that support is essential, while others claim that excessive support without considering the national debt scale is problematic, potentially intensifying social conflicts.

"Do Not Resist Self-Employed Loss Compensation" Jeong Sye-kyun Criticizes Ministry of Economy and Finance… Hong Nam-ki Says "Fiscal Resources Are Not Bottomless"

On the 21st, Prime Minister Jeong publicly demanded legal and institutional improvements for the self-employed loss compensation system. At the Central Disaster and Safety Countermeasure Headquarters meeting held at the Government Seoul Office, he stated, "Those who could not operate properly due to following government quarantine standards need appropriate support," and added, "It is now time to consider institutionalizing this." Although the Ministry of Economy and Finance initially held a negative view, saying it was difficult to find overseas cases where such a compensation system was legislated, Prime Minister Jeong became furious after receiving the ministry's report and publicly criticized them.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki once again opposed the legislation of the loss compensation system. On the morning of the 22nd, he posted on his social media that regarding the ruling party's push to institutionalize compensation for business restrictions, "We will review it in a way that provides as much help as possible," but also stated, "Regarding legislative institutionalization, we will honestly inform and coordinate on the difficulties and limitations from the fiscal authorities' perspective."

As the head of the ministry, he repeatedly mentioned the burden of the current national debt. He said, "While overcoming the COVID-19 crisis, national debt is rapidly increasing, worsening fiscal conditions," and emphasized, "Fiscal resources are not bottomless, so we must always remember that fiscal conditions and financial resources are important policy variables to consider."

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance (left), and Chung Sye-kyun, Prime Minister (right) [Image source=Yonhap News]

Ruling Party Proposes 24.7 Trillion Won Monthly Loss Compensation Bill… Funding Through Bank of Korea Government Bond Purchases

Despite the Ministry of Economy and Finance's objections, the ruling party presented a plan requiring 24 trillion won per month just one day after Prime Minister Jeong's direct review order. Democratic Party lawmaker Min Byung-duk proposed the "Special Act on Loss Compensation and Coexistence for Overcoming Infectious Diseases such as Coronavirus." The bill guarantees up to 70% compensation for losses of self-employed individuals subject to business suspension orders due to strengthened infectious disease quarantine measures like COVID-19. It allows compensation within 60% for restricted business sectors and 50% for other general sectors.

According to Min's estimates, this would require 24.7 trillion won monthly. To secure funding, Min proposed issuing government bonds, which would then be purchased by the Bank of Korea. He also stated that over 50 lawmakers within the party have expressed their intention to co-sponsor the special act.

As the massive government budget required for the self-employed loss compensation system gained momentum, government bond yields fluctuated. According to the Korea Financial Investment Association the previous day, the 10-year government bond yield rose by 0.052 percentage points to 1.758% annually, the highest since January 20, 2020 (1.762%). The 20-year government bond yield closed at 1.867%, up 0.034 percentage points, marking the highest since May 22, 2019 (1.872%). The 3-year government bond yield also increased by 0.022 percentage points to 0.993%, the highest since May 17 last month (0.999%).

This reflects growing concerns over fiscal deficits. Analysts explain that large-scale government bond issuance is essential to secure funding for self-employed individuals, which inevitably floods the market with government bonds, causing bond prices to fall (and yields to rise). As government bond yields rise, the Bank of Korea's efforts to lower the base interest rate in response to COVID-19 will be undermined. Rising market interest rates ultimately increase the financial burden on households and self-employed individuals who need livelihood loans.