[Inside Chodong] The Trap of Sweet Cash Handouts

Once again, they have fallen into the trap of 'cash handouts.' It has been a week since the regional currency law (Act on the Promotion of Local Love Gift Certificates), proposed by the Democratic Party of Korea as an alternative to the '250,000 KRW payment to all citizens,' was passed in the National Assembly plenary session led by the opposition parties. Although there is still one week left before the deadline for the bill's enactment, President Yoon Seok-yeol appears ready to exercise his veto power at any moment.

The Democratic Party claims it is "the most efficient policy to alleviate polarization and revive not only the local and neighborhood economies but also small business owners." Representative Lee Jae-myung shares a success story from his time in Seongnam City, where issuing about 25 billion KRW worth of regional currency revived the once-failing traditional markets in Seongnam.

The idea is to distribute money to all citizens, and ultimately, everyone would receive an unexpected 250,000 KRW, so it is not necessarily a bad thing. The distributed regional currency will inevitably be spent in some way, and it will have some positive effect on the local economy.

However, if the issuance of local love gift certificates is mandated and financial support is made obligatory, it is clear that this will be a 'trap' when considering whether it will benefit our economy in the mid to long term. Unlike the regional currency experiment conducted by Representative Lee in Seongnam, if all local governments issue regional currency, the effect of revitalizing the local economy will inevitably disappear.

A report by the Korea Institute of Public Finance in September 2020, titled "The Impact of the Introduction of Regional Currency on the Local Economy," analyzed data from 2010 to 2018 and found no statistically significant effect on local economic revitalization after the issuance of regional currency. The logic is that regional currency should only be issued in specific underdeveloped areas to retain consumption that might otherwise leak to neighboring regions, but if issuance is mandated by law, all local governments will issue it, offsetting the effect.

The basis for the Democratic Party's claim of "increased consumption within the region → recovery of domestic demand" is also insufficient. During the COVID-19 pandemic in 2020, we distributed 14 trillion KRW in disaster relief funds to the public, but only 30% of that contributed to stimulating consumption. If a universal support of 14 trillion KRW yields only a 30% effect, it is a failure in terms of cost-effectiveness (performance relative to price).

Above all, it is difficult to overlook the behavior of pressuring the president, who must uphold the law, to enforce an unconstitutional law. Article 54, Paragraph 2 of the Constitution states that "the government drafts the budget," and Article 57 specifies that "the National Assembly cannot increase the amount of expenditure items or establish new budget items without the government's consent." This infringes on the government's constitutional right to budget formulation and poses a significant risk of violating the principle of separation of powers.

The problem is that, regardless of the situation, the Democratic Party has nothing to lose politically. In a situation where the president is likely to exercise his veto, the Democratic Party can maintain the narrative that "the government and ruling party are opposing support for people's livelihoods." The wavering atmosphere within the ruling party is also due to the same reason. They witnessed a regime that succeeded by distributing massive cash handouts under the pretext of COVID-19 during the 2020 general election.

On this day, the National Assembly will also re-vote on the Special Act on Livelihood Recovery Support Funds, which includes the provision of 250,000 KRW per person, aligned with the regional currency law. In a situation where the country is already burdened by debt, it is necessary to avoid incurring more debt to pay off existing debt. The National Assembly Budget Office estimated that 18 trillion KRW would be required to implement the 250,000 KRW payment to all citizens. As of last year, the national debt has already exceeded 1,126 trillion KRW, and 18 trillion KRW is too large a burden to serve as a catalyst for domestic demand stimulation. The current reality, where there is no rational standard for fiscal input and both ruling and opposition parties seem to be using this as a tool for political conflict, is all the more regrettable.