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June 4, 2020

SOUTH KOREA: Moon looks to long-term growth in new stimulus package

BY Tobias Harris

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The Moon Jae-in administration unveiled South Korea’s largest-ever supplemental budget, a KRW 35.3tn (USD 29bn) package that is more than its first two emergency budgets combined. Although the total spending is less than meets the eye, since it includes the budget includes KRW 10tn (USD 8.2bn) in savings due to “revenue adjustments,” the new budget provides significant new outlays for emergency measures, including subsidies to help employers retain workers, strengthen the safety net for unemployed workers, help ailing exporters, and boost household consumption. The budget also marks a turning point for Moon, who, with just under two years remaining in his term, is seeking to harness his new electoral mandate to shift South Korea to a new long-term growth model under the banner of a “Korean New Deal.” Whether the administration is able to deliver this program, which includes a “Digital New Deal” and “Green New Deal,” will be Moon’s most significant challenge for the remainder of his term and could be the foundation for long-term political dominance by his Democratic Party of Korea (DPK).

The Korean New Deal is effectively Moon’s answer to “fourth industrial revolution” industrial policy programs pursued by South Korea’s major competitors in advanced manufacturing. The Digital New Deal will promote the widespread use of big data, artificial intelligence, and cloud computing to improve government services, make high-speed Internet access universal, and bolster capacity for remote learning and working. The Green New Deal will encourage the shift to renewable energy sources and subsidize green manufacturing. These programs will be supplemented by a more robust safety net for workers that not only expands the availability of unemployment insurance but also provides new opportunities for skills acquisition and retraining. These programs are a relatively small piece of the third supplemental budget – only KRW 5.1tn (USD 4.2bn) of the total, with the largest share going to the Digital New Deal – but this is only a down payment on what has been envisioned as a five-year program that could entail outlays of roughly KRW 76tn (USD 62.4bn).

Other than Korean New Deal spending, the supplemental budget proposes roughly KRW 18tn (USD 14.8bn) in spending on emergency relief programs. Although the Bank of Korea (BOK) actually revised Q1 GDP data slightly upward on Tuesday – the bank reported that the economy shrank in real terms by 1.3% quarter-over-quarter instead of the 1.4% preliminary figure – but the BOK anticipates that the decline could be more than 2% in Q2. Whereas the second supplemental budget was directed mainly at households, the third is aimed mostly at businesses, distributed as subsidies for small businesses, contributions to a government fund to buy corporate bonds, and subsidies for wage support. A portion of the budget will also encourage “reshoring” by manufacturing, but unlike in other countries, this has not been framed as part of reducing dependence on China.

While Moon hopes that the Korean New Deal will be the capstone of his administration’s efforts to reform the Korean economy, the supplemental budget confirms that a larger national debt will also be part of his legacy. The government will issue an additional KRW 23.8tn (USD 19.5bn) in debt to pay for the new spending, raising the debt-to-GDP ratio to an enviable but still record-high 43.7%.

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