According to the Ministry of Strategy and Finance, the additional fiscal budget will be spent on helping out low income families, providing jobs, boosting regional economies, assisting small and medium businesses, and investing for the future.

When government decides to spend money, it usually raises the funds by issuing government bonds. One of the consequences of government borrowing is that when the government borrows funds from the market, the interest rate goes up, as there is more demand for loanable funds. This has the adverse effect of making financing difficult for companies on the margin. These are weaker companies that would have otherwise survived by borrowing money at a cheaper interest rate.

Another problem is that the government is not necessarily an efficient spender of money. More often than not, precious time is lost in political debate, and lack of expertise and information further make efficient spending difficult. Private companies and individuals, who are focused on their own profits, are much more efficient.

Right now, the government’s mantra is all about jobs. Therefore, it would be much wiser to keep the interest rate low, so that the companies on the margin can weather this storm. If they fall, workers would be fired. Workers are also consumers who buy the goods that other workers produce. When workers get fired, this reduces demand for other goods, which leads to other workers being fired. This is the exact opposite of what must happen if the government wants the economy to pick up.

Government spending is not necessarily a bad thing. Sometimes, the government must appear to be doing something in the face of difficulties and boost morale of its citizens. However, careful judgment should be used when deciding how much government spends, and where it spends the money. If the additional fiscal budget fails to go where it’s most needed, Korea would only end up with a bigger government debt that future generations would eventually have to pay back.
 

Shim Hyun-seok
(2nd Sem., Dept. of Econ.)