The government is to unveil its economic management plan for the second half tomorrow. Policymakers must have had difficulty drawing up the plan as they have to meet a raft of short- and long-term challenges facing the economy with a limited set of policy options.
In the short term, their primary challenge is to keep the economy on a steady growth path despite worsening economic conditions at home and abroad.
Recently, foreign and domestic economic research institutes lowered their growth estimates for Korea this year as global economic growth slows due to the continuing eurozone crisis and a lackluster performance in the United States and China.
For instance, the International Monetary Fund adjusted its projection for Korea from 3.5 percent to 3.25 percent earlier this month.
Following these institutes, the government is expected to lower its growth forecast from 3.7 percent to somewhere below 3.5 percent. Together with the revision, the government is projected to announce a set of measures to shore up the sagging economy.
According to reports, officials of the Ministry of Strategy and Finance have been exploring ways to increase public spending without creating an extra budget. The government is against forming a supplementary budget now for a couple of reasons.
Officials rightly regard creating an extra budget as an option of last resort that should be reserved for use when a real emergency situation occurs ― for instance, a Greek debt default followed by a credit crunch in the global financial markets that could send the Korean economy into a tailspin.
Even if the government wants to draw up an extra budget now, it cannot under the current National Finance Act. The law allows the government to request a supplementary budget only when a war breaks out, devastating natural disasters occur, mass unemployment takes place as a result of economic recession or conflicts flare up between the two Koreas. The current situation does not meet any of the legal requirements for an extra budget.
Hence, the government has been seeking to tap into unused and carryover funds in its budget and surplus funds of public agencies. In addition, it will have the state-run credit guarantee funds provide more guarantees to small and medium-sized companies, which has the effect of increasing public spending.
Yet the amount of funds that can be raised this way is limited. A more fundamental problem is that even if the government increases spending, there is no guarantee that it will have an economy-boosting effect. Given that the economy is already overflowing with liquidity, adding several trillion won to it is unlikely to make a difference.
To boost the economy, the government needs to address the household debt problem and reactivate the frozen housing market. It also needs to tear down regulatory barriers in the service sector. But these tasks are beyond the capacity of the incumbent administration as it has just several months left before the end of its term.
This applies to such long-term challenges as population aging and boosting the economy’s growth potential. The nation now has to wait for a capable new government to come up with solutions to these and other intractable problems.
