[14 Trillion Snowflake Supplementary Budget] Quarantine Support Funds Extend to Travel and Accommodation... "Please Respect Government Proposal" Amid Possible National Assembly Increase Requests

2022 1st Supplementary Budget Briefing Q&A Full Transcript

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki briefing on the '2022 Supplementary Budget' at the Government Seoul Office in Jongno-gu, Seoul, on the morning of the 21st.

[Sejong=Asia Economy Reporter Moon Chaeseok] The supplementary budget (supplementary budget bill) worth 14 trillion won to support small business owners and self-employed individuals who suffered business losses due to the government's COVID-19 quarantine measures passed the Cabinet meeting on the 21st. Support will be provided not only to industries subject to loss compensation such as business suspension and operating hour restrictions but also to non-compensated industries such as travel and accommodation.

After submitting the government proposal to the National Assembly on the 24th, Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki emphasized, regarding the possibility of an increase in the supplementary budget amount during the discussion process, "I hope the government proposal will be respected as much as possible during the National Assembly's discussion process."

The following is the full Q&A of Deputy Prime Minister Hong's main briefing and detailed briefings by Second Vice Minister Ahn Do-geol and Budget Director Choi Sang-dae of the Ministry of Economy and Finance.

Main Briefing

-There is controversy that the Bank of Korea's interest rate hike and this supplementary budget are out of sync. There are also concerns that the supplementary budget could stimulate inflation and accelerate additional rate hikes.

▲(Deputy Prime Minister Hong) The normalization of interest rates and the implementation of active fiscal policy can be seen not as being out of sync but as a 'policy mix' that complements each other in the process of an unbalanced recovery from the crisis. Monetary policy was decided by the Bank of Korea because appropriate interest rate normalization was necessary considering overall growth, inflation, macroeconomic conditions, and financial imbalances. On the other hand, expansionary fiscal policy is naturally responsible for supporting vulnerable groups, especially self-employed and small business owners who are suffering due to strengthened quarantine measures during this uneven recovery process. Rather than being out of sync, these two policies are working complementarily.

The decision on whether to raise interest rates further depends entirely on the monetary authorities, the Bank of Korea. Given the recent rapid rise in inflation, there are concerns that releasing 14 trillion won through the supplementary budget might affect inflation. However, since most of the supplementary budget funds are transfer payments to self-employed and small business owners, the direct impact on inflation is limited. Nevertheless, if the supplementary budget size increases further and acts as liquidity, concerns about inflation cannot be ruled out. Therefore, we tried to determine the supplementary budget size considering both aspects.

-Even with a supplementary budget of about 14 trillion won, will the fiscal rules submitted to the National Assembly by the government be observed?

▲(Deputy Prime Minister Hong) The National Fiscal Act related to fiscal rules is currently pending in the National Assembly and has not been finalized. Calculating the 14 trillion won scale using the fiscal rule formula shows that it falls within the scope of the fiscal rules.

-The political circles continue to demand an increase in the supplementary budget. What discussions have you had with the ruling and opposition parties regarding the supplementary budget size? Is there a possibility that the government proposal will change during the National Assembly's discussion?

▲(Deputy Prime Minister Hong) We have heard many voices from the National Assembly wanting to increase the supplementary budget size. However, in determining the supplementary budget size, the government comprehensively considered the level of additional support needed for truly struggling self-employed and small business owners, the size of excess tax revenue, and the fact that the main budget of 608 trillion won already includes significant budget for supporting vulnerable groups including self-employed and small business owners. Considering existing support needs and main budget support needs comprehensively, and taking into account macroeconomic factors such as inflation and the bond market, we determined the supplementary budget size. Therefore, we hope that the government's supplementary budget size and content will be respected as much as possible during the National Assembly's discussion process.

-The supplementary budget size is similar to last year's national support fund. Why is support limited to small business owners rather than the entire population?

▲(Deputy Prime Minister Hong) More than 80% of this supplementary budget will be used to support self-employed and small business owners. Of course, the entire population is struggling due to COVID-19, and there are other groups besides self-employed and small business owners. However, the groups most directly affected and suffering due to strengthened quarantine measures are self-employed and small business owners, who are cooperating by accepting direct restrictions from these measures. In this sense, within the limited resources, it is considered desirable to provide thicker support to those who suffered damage, so we tried to support self-employed and small business owners more robustly.

Moreover, many budgets supporting other groups beyond businesses subject to business suspension or restrictions are included in the main budget. In particular, in November last year, the government announced and actively implemented support and livelihood measures worth about 12.7 trillion won for small business owners not eligible for loss compensation. Especially for vulnerable employment groups, support is being provided quickly using budgets already reflected in the main budget, such as livelihood stabilization funds or job stabilization funds. The government has also prepared related measures since November last year to support sectors facing great difficulties such as culture, tourism, sports, travel, and exhibition industries. Going forward, the government will continue to use various support resources including the main budget to provide maximum support not only to self-employed and small business owners but also to other groups.

-The government explains this as a 'quarantine supplementary budget' based on excess tax revenue. After the excess tax revenue is confirmed in the April settlement, will all government bonds issued for this supplementary budget be repaid?

▲(Deputy Prime Minister Hong) When excess tax revenue occurs, public funds debt is repaid according to the National Fiscal Act. Also, a certain portion is legally stipulated to be used for government bond repayment. The remainder becomes the fiscal surplus. Using public fund repayment, government bond repayment, and fiscal surplus, a significant portion of government bonds is expected to be repaid.

However, there are two constraints. First, about 40% of excess tax revenue is allocated as local grants. Therefore, about 40% of excess tax revenue is transferred to local governments according to relevant laws. Second, even if fiscal surplus occurs, whether to use the surplus beyond public fund and deficit bond repayment for additional government bond repayment, carry it over to next year's tax revenue, or use it for another supplementary budget depends on the situation and will be decided accordingly.

◆Detailed Briefing

-What will be the deficit of the managed fiscal balance after this supplementary budget?

▲(Director Choi) Currently, the managed fiscal balance deficit in the main budget is 94.1 trillion won, which is -4.4% of GDP. After reflecting this supplementary budget, the managed fiscal balance deficit will be 108.2 trillion won, or -5.0% of GDP.

-What was the size of last year's unspent budget? Where did it occur? What are the plans for it?

▲(Vice Minister Ahn) Unspent budget can occur when execution is less than the initial budget. The unspent amount is currently being compiled by individual projects. The final figures will be available around the 10th of next month when total revenue and expenditure are closed.

Also, unspent amounts are counted as tax surplus. Fiscal surplus is handled according to Article 90 of the National Fiscal Act. Local grants are settled, and public fund repayment and government bond repayment are carried out.

-There is an analysis that the excess tax revenue error is due to increased real estate-related taxes. What is the exact cause?

▲(Vice Minister Ahn) The government has consistently pursued real estate policies under the principle of stable housing supply for actual demanders and speculation suppression. At the end of the year, the government re-estimated tax revenue and found additional excess tax revenue. Of course, capital gains tax and gift tax, which are influenced by the real estate market, increased. However, a larger portion, about 70% according to the government, comes from corporate tax, value-added tax, earned income tax, securities transaction tax, etc. Faster-than-expected export recovery and employment improvement have occurred. Excess tax revenue was generated due to economic recovery.

-Last year, 180 trillion won of government bonds were issued, and this year, the issuance scale increased to a similar level due to the supplementary budget. With interest rate hikes, the burden on private economic agents increases. Is there a fiscal authority's limit on total government bond issuance or the increase in national debt ratio?

▲(Vice Minister Ahn) The government plans to issue additional government bonds as much as possible within this year. We will do our best to avoid temporary supply-demand deterioration.

-Volatility in the government bond market has recently increased. How do you evaluate this? There are concerns that using excess tax revenue for the supplementary budget limits the government's market stabilization tools. What is the Ministry of Economy and Finance's view?

▲(Vice Minister Ahn) If volatility becomes excessively large due to various domestic and international conditions, we will implement timely market stabilization measures through policy coordination with the Bank of Korea. Currently, the economy is generally recovering, so tax revenue improvement is expected to continue, which will help fiscal management. During the recent economic crisis recovery, debt has risen sharply, and Korea faces special and medium-term fiscal risks such as aging. The government is closely monitoring these factors and will continue efforts for medium- to long-term fiscal soundness.

Specifically, to stabilize the government bond market supply-demand, the government will use available measures. The government has treasury funds and various policy tools to manage supply-demand. We will mobilize these tools as much as possible. Again, through policy coordination with the Bank of Korea, if the market reacts excessively, we will take timely stabilization measures.

-In the past, foreign exchange stabilization funds were used to finance supplementary budgets. Why was the foreign exchange stabilization fund excluded this time? Is it due to recent foreign exchange market volatility?

▲(Director Choi) The government exceptionally used foreign exchange stabilization fund resources when preparing supplementary budgets in 2020 and last year. However, generally, the government does not use the foreign exchange stabilization fund for supplementary budgets because it is a resource for stabilizing the foreign exchange market, and considering uncertainties in exchange rates and interest rates, it is inappropriate to use it for supplementary budget financing. Considering the difficulty in predicting the foreign exchange market until the end of the year, the fund's financing conditions, and market situation, it was not considered as a supplementary budget resource this time.

-Is the financial condition of the Public Fund Management Fund, which raised 2.7 trillion won this time, sustainable?

▲(Director Choi) The 2.7 trillion won of surplus funds used in this supplementary budget were generated from the Public Fund Management Fund's financing and operation performance last year. These are surplus funds carried over to this year. Therefore, there is no expected financial burden on the Public Fund Management Fund's operation this year. The fund is expected to operate smoothly within the already established financing and operation plan this year.

-This is the seventh support for small business owners. The support amount has varied each time. What is the basis for setting it at 3 million won this time? Why was there no differentiation by industry as in the past?

▲(Vice Minister Ahn) As we cautiously move toward daily recovery, the Omicron variant emerged as a new variable, and quarantine measures have been strengthened and extended, creating a very unfavorable situation. Especially now, during the Lunar New Year peak season, small business owners are suffering greatly. Considering these factors, we set the amount at 3 million won this time.

For reference, the government provided 3 million won in loss compensation in the third quarter. That was the average loss compensation amount. This amount can serve as a comparative indicator to gauge the appropriateness of the quarantine support fund amount set this time.

This time, the government is giving the same amount to everyone. The difference from before is that the loss compensation system is operating. That system calculates and compensates actual losses by individual industry and business. Detailed parts are covered by the loss compensation system, and this quarantine support fund is set as a single amount to help all small business owners generally with their difficult situation.

-How does the government evaluate the effect of cash support for small business owners implemented so far? Has there been any internal review of the support effect? If so, is there a plan to disclose it?

▲(Vice Minister Ahn) Of course, there has been. It is believed that cash support helped small business owners maintain their workplaces during difficult times and cover fixed costs such as rent and labor costs, which are incurred regardless of business performance. However, quantitative analysis of 'what the specific effect will be' is being gradually analyzed by the Ministry of SMEs and Startups over time and will be prepared for announcement at an appropriate time.