How to throw economic policy into disarray

If the government steering goes astray, it will only invite a wave of populism.

Lee Sang-ryeolThe author is a senior editorial writer of the JoongAng Ilbo. Data suggests robust exports thanks to the chip boom, while the strain on the household economy is deepening. Files for unemployment benefits surged 7.6 percent on year in July to number at 112,000. Retail sales fell 2.9 percent in the second quarter in the biggest year-on-year dip in 15 years. Despite the losses, more than 110,000 applied for early pension release last year, up 90 percent from the prior year. To get by, many are breaking their insurance policies or turning to credit card or shark loans. Extreme polarization is breaking up the economy.

The government is probably doing its best. But the sad results suggest problems with its policy direction or implementation process.

First, the government is too rigidly bound by its commitment to fiscal integrity. The budgetary appropriation for 2024 was its first misstep. The budgetary increase of 2.8 percent had been the lowest since 2005. Fiscal tightening primarily restricted policy maneuvering room this year. The Yoon Suk Yeol government had the duty to normalize fiscal balance to contain deficit from the 400 trillion won ($298.6 billion) in debt bulging across the previous five-year Moon Jae-in presidency. But an overly restrictive fiscal policy coupled with monetary tightening to tame inflation can only worsen the slowing economy. Kim Chong-in, former interim head of the governing People Power Party (PPP), rightly pointed out that people are left to find their own way to survive due to the government’s obsession with fiscal integrity.

Second, government offices often fell out of step. The primary examples had been on financial and real estate policy. The benchmark rate remains 3 percent higher than the pandemic period. The self-employed are struggling to pay off expensive loans after the pandemic grace period ended amid the economic downturn. The presidential office has been mumbling about the need for a rate cut. But lowering the benchmark rate can add traction to the surging household debt and the heat in the housing market. To build an environment for a lower rate, the government should have been aggressive in stabilizing household debt and the housing market through stricter loan regulations and increased housing supplies. But supplies came short while government-backed mortgage loans increased. Authorities put off tightening loan regulations through stressed debt-service ratio application. The presidential office; the Ministry of Finance and Economy; the Ministry of Land, Infrastructure, Transport; and the Financial Supervisory Service acted out of sync. The consequences of this are the galloping housing prices and ballooning household debts, which can only hamper the shift to monetary loosening.

Third, government policies have been contradictory. The ruling party is pitching for the abolition of the financial investment income tax and a rate cut in the inheritance tax. But the tax front is in a dismal form. Fiscal deficit topped 100 trillion won in the first half. Tax income has already shriveled by 10 trillion won from last year that closed with a record deficit. A tax cut is not compatible with the principle of fiscal integrity. Tax cuts can gain justification when the government finds an effective way to substitute a lack of tax revenue or convinces the public that the move eventually will bolster its tax revenue. If reinvigorating the stock market is the main purpose, the government should not have banned short-selling to scare off foreign investors. It needed to find more ingenious way to stimulate the Value-Up program.

The Yoon administration benchmarks the Lee Myung-bak administration which successfully weathered the 2008 global financial crisis. But the achievement didn’t come out of the blue. Finance Minister Kang Man-soo who spearheaded economic policy at the time said he was committed to rationalizing the exchange rate, restoring a surplus in the current-account balance and scrapping the comprehensive property ownership tax even if his policy cost his seat. He achieved the first two — and a reduction in the comprehensive property tax rate though he stopped short of eliminating the tax. The conservative government was unified in placing higher priority on external balance over internal balance during crisis times. His successor Yoon Jeung-hyun in his first press conference on Feb. 10, 2009 shocked the market by shaving the government’s growth estimate for the year from the initial 3 percent to the negative 2 percent. “The government must be honest to gain confidence from the market and the people,” he said. The honesty helped draw bipartisanship for a supplementary budget worth 28 trillion won to help stimulate the economy.

The climate is perilous with household debt topping 1,900 trillion won and apartment prices in Seoul hitting new heights. The ship must set the priorities in order and demand unwavering teamwork from the crew. If the government steering goes astray, it will only invite a wave of populism.

If the government steering goes astray, it will only invite a wave of populism.