Fiscal Stimulus, Korean Style

Korea is one country that unambiguously has fiscal space right now. Low government debt. The on-budget deficit was, until recently, more than offset by the off-budget surplus in Korea’s social security fund. With a slowing economy and a massive (almost 8 percent of GDP in 2015) current account surplus, Korea unambiguously should be running an expansionary fiscal policy. Read Summers and Eggertsson.

But I do not quite see how "paying down debt" can be part of a true fiscal stimulus package.

Nor do I see how a fiscal stimulus can do much to spur the economy if it doesn’t create a new borrowing need. The Wall Street Journal:

"Unlike the heavily debt-funded supplementary budget last year, this year’s supplement will narrow the estimated deficit marginally, thanks to a partial debt repayment by the government. The finance ministry expects the country’s sovereign debt to stand at 39.3% of gross domestic product in 2016, lower than its initial estimate of 40.1%"

Emphasis added.

It seems like Korea’s stimulus will be financed by "surplus" tax revenues, not new debt.

"The 11-trillion-won ($9.7 billion) additional budget will mostly be funded by surplus tax revenue and state funds left over from the previous fiscal year, the finance ministry said."

I get it. Intentionally underestimating tax revenues (Korea’s economy hasn’t exactly boomed this year, which makes the revenue surplus a bit surprising) is one way of building a fiscal buffer into the budget. Without a supplementary budget, Korea presumably would have been on track to tighten fiscal policy this year. And if this year’s stimulus is financed in part from last year’s budget, then the size of last year’s stimulus probably was smaller than reported.*

But please do not call less austerity a major shift in fiscal policy! Boosting demand growth and bringing Korea’s external surplus down will take a true shift in Korea’s fiscal stance, not the announcement of a fiscal stimulus that doesn’t really stimulate.

* Japan’s Ministry of Finance sometimes has played a similar game at times, with "no-actual-new-borrowing" supplementary budgets marketed as stimulus plans. The net result is that it far harder than it should be to estimate the actual growth impulse from Japan’s fiscal policy, apart from the obvious negative impulse from the consumption tax hike. Headline announcements of new fiscal packages do not necessarily give rise to a positive fiscal impulse, as they often only offset what otherwise would be a fiscal contraction.