The Korea Herald


[Letter to Editor] Korea’s increasing fiscal deficit financeable

By Korea Herald

Published : Sept. 9, 2020 - 05:31

    • Link copied

The opinion expressed in the Sept. 4 editorial of The Korea Herald seems to consider the 2021 Korean budget as an extravagance that is unaffordable. I would beg to differ. Although it is always useful to keep some fiscal space for economic slowdowns, not to mention Black Swan events such as the pandemic, Korea‘s increasing fiscal deficit estimated to reach 5.4 percent of GDP next year (compared with 3.5 percent this year) is totally financeable and unlikely to cause the downgrades that are feared.

National debt as a proportion of GDP rising from 39.8 percent to 46.7 percent is not a huge jump. It should be noted that reserve levels at BOK are rising and that the recession experienced in the first two quarters of the year resulted in a drop in growth less than most other major countries in the OECD. Hence a recovery is to be expected; however, that recovery can be fostered by using fiscal space when it is necessary, and most advanced economies are doing just that. Compared to others, the modest rise in domestic debt is small and easily managed.

The real issue is what will the expenditures entail and what can we expect from the Korea economy this year and next. Spending in areas that will improve productivity and will boost competitiveness would be good expenditures, as would well-targeted spending for the elder-poor and others adversely affected by the pandemic. One thing for Korea to avoid is a tepid use of fiscal policy, such as was seen in the case of Japan, where demographics have doomed the resurgence of economic growth. Excessive worrying about using counter-cyclical fiscal policy in current circumstances is to worry about the wrong thing.

From, Danny Leipziger
Professor of international business
George Washington University
Washington, D.C.