[Inside Chodong] The Ideologization of Fiscal Policy Must Not Be Repeated

Delayed Economic Stimulus Due to Yoon Administration's Missteps
Why Expansionary Fiscal Policy Must Be Done Right

"The previous administration was too focused on fiscal soundness and failed to respond to the economic downturn."

This comment was made recently to a reporter by a former high-ranking official who oversaw macroeconomics and international finance at the Ministry of Economy and Finance. It came after the Bank of Korea projected that the Korean economy would grow by only 0% this year. The criticism was that the Yoon Suk-yeol administration, preoccupied with fiscal soundness, hesitated to implement an extra budget (supplementary budget), thereby missing the right timing to respond to the economic slump, even though bold fiscal measures to revive stagnant domestic demand are urgently needed.

President Lee Jaemyung, who has inherited control of the national treasury, criticized the Yoon administration's mistakes and declared a return to expansionary fiscal policy. Upon taking office, he called for an "all-out battle against the recession" and is pushing for a swift supplementary budget. He intends to use government spending as a pump-priming measure to revive the economy, even if it means increasing national debt. He expressed a strong commitment to fiscal expenditure, saying, "Why shouldn't the government give out free money? Saying the government shouldn't go into debt is ignorant." He also argued that increasing debt is acceptable, stating, "Other countries have a national debt-to-GDP ratio of 110% or even 220%, while ours is below 50%."

There is consensus that the government should use fiscal resources in times of crisis to support the self-employed and small business owners. A sizable supplementary budget is needed to stimulate domestic demand. The problem, however, is that populist cash handouts, such as expanding local currency programs with low multiplier effects due to lack of productive investment, may not be a fundamental solution to boosting domestic demand. The slump in domestic demand is intertwined with social structural factors such as low birth rates and rapid aging. Without accompanying structural reforms, the problem cannot be solved. Although President Lee has acknowledged this situation by emphasizing "structural improvement and institutional reform to change the outdated economic structure," his key policy agenda is still filled with large-scale fiscal projects such as making local currency support mandatory from the national treasury, expanding eligibility for child allowances, and introducing basic income for rural and fishing communities.

Korea's fiscal condition is now at a point where it is difficult to sustain such populist spending. Since the pandemic, annual deficits have hovered around 100 trillion won, and warnings of a potential growth rate falling to 0% persist. As chronic deficits mount, the national debt-to-GDP ratio reached 46.1% last year, nearly double the 25.7% recorded after the 2008 global financial crisis. Except for countries that have experienced fiscal crises, it is rare to see debt increase at such a rapid pace. This is why both domestic and international institutions are issuing repeated warnings that Korea should be cautious about expanding national debt.

Contrary to President Lee's claim, concerns over national debt cannot simply be dismissed as "ignorant." The countries he mentioned, with debt-to-GDP ratios of 110% or 220%, are reserve currency nations such as the United States and Japan. These countries have a long history of fiscal expansion and their debts surged during wartime. Because there is high demand for their government bonds, they can increase debt without the burden of rising interest rates, and the risk of a credit rating downgrade is relatively low. In contrast, Korea is a non-reserve currency country, where demand for government bonds is lower and interest rate conditions are less favorable, so the appropriate level of debt is fundamentally different.

During the Moon Jae-in administration, which was fixated on income-led growth, fiscal health deteriorated significantly despite a tax revenue boom. The Yoon Suk-yeol administration, which focused solely on fiscal soundness for three years in an attempt to overcome this, was criticized for missing the golden window to respond to the economic downturn. While the pandemic played a role, one side wanted to spend too much, while the other side refused to spend at all. Economic policy, which should be adjusted according to the economic cycle and policy environment, has become politicized and ideologized. Populism based on political ideology cannot achieve either an economic rebound or sustainable growth. If a policy is merely a campaign pledge aimed at winning votes, or if it is judged to be more harmful than beneficial, revising it in the future would be consistent with President Lee's pragmatic approach.