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Korea Fiscal March 2021

Korea: Government announces fresh supplementary budget to buttress economy and support a downbeat labor market

On 2 March, the government announced a supplementary budget—the fifth since the pandemic started—aimed at buttressing an economy marked by a weak labor market and downbeat private consumption amid lingering restrictions. The package is mainly directed at small businesses, job creation and retention and Covid-19-related measures, and will likely spur domestic demand, thus providing for a broad-based recovery.

The bill is worth KRW 15 trillion (USD 13.3 billion), and comes on top of the KRW 4.5 trillion already allocated in the original budget, bringing this year’s fiscal relief to a total of KRW 19.5 trillion. The extra budget sees the total expenditure forecast for 2021 rising from KRW 558 trillion to KRW 573 trillion, which elevates the government’s projected fiscal deficit from 3.7% to 4.5% this year.

The largest share of the funding will be directed at small business owners and workers, largely in the form of handouts. In addition, a sizable portion will reinforce the vaccine rollout in a bid to reopen the country more swiftly. The remaining funds have been set aside to revive a sluggish labor market. They will support around 810,000 workers—mainly through job creation, but also through rentention subsidies and training.

Commenting on the bill and the prospect of further fiscal measures, Jeong Woo Park, Korea economist at Nomura, noted:

“The economic impact of this stimulus package on overall GDP growth depends on the fiscal multiplier and how quickly the government delivers the package. Our calculations suggest a multiplier of around 0.3 based on past fiscal stimulus packages. The government will likely spend most of the package in Q2 and Q3. Thus, we expect the stimulus measures to boost GDP growth by ~0.6pp in Q2 and ~0.3pp in Q3. […] We believe the government will likely roll out another fiscal stimulus package in the form of cash handouts to households to boost private consumption, after relaxing the current restrictions, sometime in April or early May. Hence, higher government spending, rising exports and a gradual pickup in private consumption should enable a broad-based recovery in H2 2021.”

In addition, Krystal Tan and Sanjay Mathur, economist and chief economist, respectively, at ANZ, said:

“The conditions for a firmer recovery are falling into place: […] If the domestic virus situation continues to come under control while the vaccination rollout picks up, the effectiveness of the stimulus will be enhanced. The export recovery is also broadening.”

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