Issuing 29 Trillion Won in Local Currency with 1 Trillion Won Investment... Boost for Local Economy, Fiscal Burden Remains [New Administration Policy Issue]

The Lee Jaemyung administration is injecting 1 trillion won of national funds into the first and second supplementary budgets to expand local currency (local love gift certificates). Local currency is expected to serve as a catalyst to revive the livelihoods of small business owners, who have been suffering from both a decline in consumption and a slump in commercial districts since the COVID-19 pandemic, and to reinvigorate the real economy.

The government allocated 400 billion won in the first supplementary budget and 600 billion won in the second supplementary budget for national funding to support local currency. This is the second-largest amount ever, following the 1.2522 trillion won in national funding for local currency issuance during the Moon Jaein administration in 2021. Through this, the government will issue up to 29 trillion won in local currency this year, the largest annual amount to date. The original budget for local currency issuance was 12 trillion won, but it was increased by a staggering 17 trillion won through the two supplementary budgets.

The monthly purchase limit per person for local currency has also been raised from the previous 700,000 won to 2 million won. The intention is to stimulate consumption in the short term by relaxing the purchase limit, given the significant increase in local currency issuance through the supplementary budgets. However, for paper-based local currency, which is more susceptible to abuse such as cash conversion, the per-person limit will remain at 700,000 won.

Local currency refers to a type of gift certificate that can be used within a specific region. It can be purchased at a discount from its face value and used at designated small business merchants in the area. According to the Ministry of the Interior and Safety, as of June this year, 191 out of 243 metropolitan and basic local governments (78.6%) are operating local love gift certificates. The central government provides budget support for the issuance and operation of local currency, while local governments use their own budgets along with national funds to issue and manage local currency. With the expansion of national funding for local currency, the fiscal burden on local governments has also been partially eased.

In the supplementary budget, the government decided to apply differentiated local currency discount rates according to regional conditions. The goal is not only to expand issuance, but also to maximize the effect of stimulating consumption by increasing the discount rate. Specifically, the discount rate will be set at 10% for local currency in the Seoul metropolitan area, 13% for non-metropolitan areas, and 15% for regions with declining populations. For example, in 84 regions nationwide with declining populations, such as Ganghwa-gun in Incheon, a 10,000-won local currency voucher can be purchased for 8,500 won, reflecting a 15% discount. In addition, for local governments that do not receive local allocation tax, the discount rate has been set at a minimum of 7%, up from the previous discretionary rate.

On the 21st, one week before the Chuseok holiday, citizens visiting Mangwon Market in Mapo-gu, Seoul, are purchasing ritual items. Photo by Jo Yongjun jun21@

Policy Goal: Shifting the Consumption Structure to a Regional Focus

The goal of the national funding support policy for local currency is to shift the 'consumption structure' to be centered on local regions. The focus is not on temporary economic stimulus. The key is to keep funds that would otherwise flow out through large supermarkets or online shopping malls within the local commercial district, thereby building a 'virtuous cycle within the region.' For this reason, some refer to local currency as 'money that saves the region.' If the outflow of consumption to other regions is minimized and a virtuous cycle is created where spending at local small business stores is expanded, local currency can serve as a catalyst for revitalizing the local economy.

In fact, an analysis of Sejong City's local currency 'Yeominjeon' consumption data from March 3 to the end of December 2020, during the COVID-19 period, showed that local consumption amounted to 542 billion won, an increase of 185.5 billion won (52%) compared to the previous year (356.5 billion won). Of this, Yeominjeon consumption accounted for 164.2 billion won, representing 88.5% of the increase in local consumption, demonstrating the significant impact of local currency issuance on boosting consumption. Analysis by the Korea Research Institute for Local Administration also found that local currency had positive empirical effects such as shifting consumption within the region, increasing sales, and preventing the outflow of funds.

President Lee Jaemyung proposed 'mandatory support for local currency issuance' as a presidential campaign pledge, aiming to institutionalize it as a sustainable policy. Thanks to the government's mandatory support, local governments are reportedly considering additional local currency issuance in the second half of the year. Recently, the National Policy Planning Committee is said to have discussed expanding national funding for local currency support measures with the Ministry of the Interior and Safety, the Ministry of SMEs and Startups, and other relevant ministries.

Securing Funding Remains a Challenge... Concerns Over Fiscal Burden

Some point out that, in the long term, this could place a burden on national finances. While it may provide breathing room for local commercial districts, continued national funding support would increase structural fiscal expenditures. As a result, there are also voices questioning the sustainability of the policy. The Korea Institute of Public Finance, in a report on 'The Impact of Local Currency Introduction on the Local Economy' during the COVID-19 period, analyzed that deadweight loss could occur due to goods or government fiscal expenditures. Deadweight loss refers to the net loss that occurs when the service market is not in equilibrium; while a 10% discount on local currency may induce consumer purchases, in reality, replacing cash welfare benefits such as childbirth incentives or youth allowances with local currency can inevitably result in a loss of consumer welfare.

The formation of a 'cash conversion' market, where people attempt to convert local currency into cash, is also a headache. Local governments are inevitably required to spend considerable administrative resources and costs to crack down on the cash conversion market in order to maintain a stable local currency system.

Some also argue that the actual economic revitalization effect of local currency is limited. Hong Woohyung, a professor of economics at Dongguk University, stated in an interview with Tonghwa, "Local currency serves to increase consumption among certain target groups, but its effect on stimulating overall consumption is minimal. People only purchase as much as they intend to consume; they do not spend more just because of local currency." Professor Hong explained, "Stimulating consumption means companies produce more, and consumption increases accordingly. If consumption increases but production does not, it is difficult to expect further effects in stimulating consumption."