[Viewpoint] What If You Receive 250,000 KRW in Support Funds but Jeonse Prices Rise by 100 Million KRW?

The debate over the trickle-down effect is heating up again. This follows the passage of the "Special Measures Act for the Payment of Livelihood Recovery Support Funds," which centers on providing 250,000 KRW to all citizens, through a plenary session of the National Assembly on the 3rd, led by the Democratic Party of Korea. The People Power Party, which opposed the bill, did not participate in the vote, and Lee Jun-seok, a member of the Reform New Party, cast a dissenting vote.

The passed bill includes provisions to distribute local love gift certificates worth between 250,000 and 350,000 KRW to all citizens, depending on their income level. It is the Democratic Party’s "Party Resolution No. 1" bill, originally proposed by former Democratic Party leader Lee Jae-myung. The payment amount is to be determined by presidential decree, and the estimated budget required is about 13 trillion KRW.

The opposition party argues that by providing support funds of at least 250,000 KRW per person to all citizens to help low-income households with their livelihoods and encourage increased consumption, domestic demand will be revitalized. This is in line with the trickle-down effect theory, based on economist Keynes’s theory that private consumption?the largest component of aggregate demand, alongside private investment, government spending, and net exports?must be increased to overcome a recession. Keynes emphasized that lower-income groups are more likely to immediately translate tax cuts or government support into consumption.

The logic is that increasing the income of low- and middle-income groups can lead to a virtuous cycle of increased consumption → increased production → expanded investment. The Democratic Party’s claim that "the livelihood recovery support funds are paid not in cash but as local love gift certificates, which stimulate domestic demand and help recover government tax revenues that have been shortfalled, making it an economic policy" aligns with this perspective.

The Democratic Party’s basic economic policy direction is also to offset government tax revenue losses caused by tax cuts and support funds for low- and middle-income groups by increasing taxes on the wealthy, such as corporate tax, progressive income tax, and property holding tax. Policies aiming for the trickle-down effect are crucially used when the economy is sluggish or in recession.

However, the Moon Jae-in administration’s "income-led growth," which sought the trickle-down effect, failed. Wealth tax increases, government-led job creation, and rapid wage hikes had short-term demand creation effects but caused serious side effects. Coupled with global inflationary trends, it fueled inflation, and increases in property holding taxes, including comprehensive real estate tax, added fuel to rising housing prices. During the Moon administration, the average apartment sale price in Seoul doubled from 640 million KRW to 1.31 billion KRW in five years. There was also much criticism that approaching economic response policies as growth policies was problematic.

Meanwhile, government fiscal deficits increased significantly. National debt, which was 660 trillion KRW in 2017, rose by over 400 trillion KRW to 1,067 trillion KRW in 2022. Fiscal conditions worsened further last year and this year due to tax revenue shortfalls. Considering the upcoming severe low birthrate and aging population, it is not the time to recklessly increase national debt that future generations will have to bear.

To allocate a government budget of 13 trillion KRW for the "250,000 KRW support for all citizens," large-scale government bond issuance will inevitably be required. While receiving tens of thousands of won in local love gift certificates will be used urgently to purchase essential household goods, it is ultimately money that future generations must repay. Even if it temporarily boosts domestic demand for a few months, this is only a short-term measure. Without addressing structural issues such as low birthrate and declining potential growth rate, it is akin to putting a band-aid on a serious wound.

What the political sphere should focus on for the livelihood of the people is to first tackle the recently heated apartment prices. If short-term household support measures are introduced without reducing housing costs, which are the biggest burden for households, our economy cannot enter a virtuous cycle. The Korean housing market, uniquely characterized by the Jeonse system, is more complex than those of other countries. Despite successive governments’ efforts to stabilize real estate, the market often moved in the opposite direction. Regardless of which government takes power, it is difficult to stabilize the real estate market with biased perspectives and remedies.

How about the ruling and opposition parties forming a "Real Estate Special Committee" in the National Assembly to prepare short- and mid-to-long-term plans and attempt cooperation? No matter how much tax cuts and support funds are provided, what good is it if housing and Jeonse prices rise by 100 to 200 million KRW within a few months? On the other hand, if housing prices plummet soon due to the aging population, what will happen to the middle class that has managed to hold on with just one home? With growing concerns that the real estate market may follow Japan’s path in the mid-to-long term, supply and demand management measures must be approached comprehensively and continuously. For this, the political sphere should candidly come together and discuss real estate policies, even if there are significant differences in opinion.