[Exclusive] Additional Issuance of 5 Trillion Won in Local Currency...Selective Support Funds and Cashback up to 300,000 Won

Additional 5 Trillion Won Issued in Local Currency in 2nd Supplementary Budget
Consumption Stimulated Through Credit Card Cashback
Support Funds Provided to Lower 70-90% Income Brackets

[Asia Economy Reporters Moon Chaeseok and Jang Sehee] The government is expected to include a plan to issue an additional 5 trillion won worth of local currency in the second supplementary budget bill to be announced around the end of this month. The package will also include a ‘cashback’ system that returns a certain amount based on increased consumption to stimulate domestic demand. Regarding disaster relief funds, the government plans to maintain a policy of ‘selective payment’ focused on affected groups.

According to the Ministry of Economy and Finance on the 17th, a ‘three-part package to revitalize domestic demand’ with these contents is expected to be included in the supplementary budget bill. A government official explained that the additional issuance of local currency is intended to help local small business owners and self-employed people struggling due to COVID-19 and to stimulate the domestic economy.

The supplementary budget bill is also expected to include a ‘cashback’ policy that refunds up to 300,000 won per person if the average monthly credit card usage in the third quarter increases compared to the second quarter. However, this will be limited to consumption at small businesses and self-employed sectors such as restaurants and accommodations. This measure comes as a substitute since nationwide disaster relief payments have become practically difficult.

Disaster relief funds are expected to be adjusted within the income lower 70-90% range. While the Democratic Party of Korea advocates for ‘income lower 90%’ excluding only high-income earners or the entire population, the Ministry of Economy and Finance is coordinating opinions aiming for the ‘income lower 70%’ range. The ministry maintains the ‘selective support’ policy, noting that targeting only high-income earners would incur excessive administrative costs.

However, experts point out that since policies for issuing local currency and disaster relief funds have already been implemented several times, the effect on stimulating domestic demand may not be as significant as expected.

Professor Sung Myungjae of the Department of Economics at Hongik University explained, “In the case of local currency, the policy comes with the condition that it must be used in specific locations,” adding, “For example, if 100 won is given to someone who meets the policy goal, causing others to lose 300 won, those who lose out do not care, which is the same logic.” He further predicted, “Since it is not a completely new policy, the ‘external economic effect,’ which means social benefits far outweigh private benefits, will not be very large.”

Concerns have also been raised that the cashback policy could lead to controversies and conflicts regarding the criteria for the payment period. Professor Kim Taegi of Dankook University’s Department of Economics said, “If the condition is simply that consumption in the third quarter is higher than in the second quarter, unnecessary controversies may arise about whether it applies to wealthy people who originally consumed a lot,” and advised, “It would be more helpful for the country’s economic recovery to boldly provide tax benefits to companies that plan to hold discount events rather than individuals.”

It is also expected that these policies will not significantly affect the fiscal multiplier (the effect of 1 won of fiscal spending on increasing GDP), which gauges the fundamental strength of the economy, or potential growth rate increases. Professor Kim Sangbong of Hansung University said, “These policies will not greatly help increase the potential growth rate or the fiscal multiplier.”