South Korean President Yoon Suk-yeol and main opposition Democratic Party (DP) leader Lee Jae-myung are expected to meet for the first time this week, a rare concession by Yoon after his party’s election defeat earlier this month, and a key item on the agenda will likely be Lee’s proposal to provide approximately $180 (250,000 won) to every citizen.

It remains to be seen whether Yoon and Lee will be able to reach an agreement on this proposal, which Lee estimates will cost about $9.5 billion (13 trillion won), but experts argue that, if adopted, such cash handouts could have an array of unintended consequences, including exacerbating existing economic challenges like inflation.

REGRESSIVE MEASURES

Lee argues that providing a one-time payment of 250,000 won to every citizen would alleviate the financial burden on households, offering much-needed relief to families struggling to cope with high inflation rates.

This direct financial support could help households meet their essential expenses and maintain a basic standard of living, particularly for those in lower-income brackets who have been disproportionately affected by rising prices, according to the DP.

However, the measure may not be as equitable as proponents claim.

“The defining characteristic of a progressive tax system is that people who earn higher incomes pay higher tax rates. But this proposal to disburse funds to everyone at a flat rate ignores that principle,” Hong Ki-yong, a professor at the Business School of the University of Incheon, told Korea Pro.

“That is counterproductive. It will end up benefiting the wealthy instead of low-income households,” Hong added, as the infusion of 13 trillion won into the economy would cause demand-pull inflation, especially for consumables, which would “make the poor poorer.”

While Lee argues that his proposal would help to “resolve the country’s economic emergency,” Hong warned that it wouldn’t help to support vital sectors such as manufacturing.

“If they go through with it, this cash handout will be disbursed as local gift certificates. While that might be helpful for low-income families, there’s not much that people can buy in their local neighborhoods with this money. The money will be spent almost entirely on consumables like food, which doesn’t help from a national perspective.”

Prime Minister Han Duck-soo emphasizes during a Cabinet meeting that the government must concentrate people’s livelihood issues, April 23, 2024 | Image: ROK Prime Minister’s Office

FISCAL PRUDENCE

Experts also raised concerns about the timing and the necessity of such expansive fiscal measures.

“The middle-class and most working-class people aren’t in dire financial straits. We’re not facing maximum unemployment or recession,” Kim Woo-cheol, a professor of economics at the Department of Science in Taxation at the University of Seoul, told Korea Pro.

“I see no convincing rationale for why such cash payments are necessary at this moment; it’s just not appropriate at this time. We simply do not have the fiscal capacity to distribute this much cash,” Kim said. 

South Korea’s finance ministry reported earlier this month that the country’s national debt exceeded $820 billion last year, causing the debt-to-gross domestic product ratio to surpass 50% for the first time. Concurrently, South Korea’s tax revenue fell $39 billion in 2023 from a year earlier.

“If the government had excess funds or if we were a resource-rich country, distributing a basic income might make sense, but that’s not our situation,” Kim said.

“Rather than pushing for universal cash transfers, it would be more appropriate to focus on the lowest 20% of income earners,” Kim said, thereby maximizing the impact of government spending.

Bank of Korea, Jan. 2010 | Image: Bank of Korea

MAJOR INDUSTRIES

Demand-pull inflation — when demand for goods and services exceeds supply — would likely result from Lee’s universal cash transfer proposal, and it could force the Bank of Korea (BOK) to maintain its hawkish monetary policy.

The BOK maintained its 3.5% interest rate for the 10th consecutive time earlier this month.

High rates increase the cost of borrowing, which can severely affect South Korea’s construction and real estate sectors, traditionally reliant on low borrowing costs.

High interest rates raise the cost of borrowing, leading to a sustained cooling effect on the real estate market, disproportionately affecting property owners with variable-rate loans.

They also pose a significant challenge to project financing for construction, which is particularly vulnerable given its involvement with non-banking financial institutions such as insurers, savings banks, securities firms and credit card companies.

In a downturn in the real estate market, project financing investments are more susceptible to losses, as the financed properties might have to be sold at a discount or could become difficult to sell. This could lead to broader financial instability, requiring cash injections for banks and forcing cutbacks in lending.

President Yoon Suk-yeol hosts a people’s livelihood discussion forum, April 4, 2024 | Image: ROK Presidential Office

POSSIBLE SCENARIOS

Given their opposing economic policies, it remains to be seen if Yoon and Lee will be able to reach any consensus. However, Yoon’s apparent openness to dialogue with Lee suggests a recognition of the necessity for a more collaborative approach to addressing the nation’s economic challenges.

Given the strong opposition expressed by the PPP to the cash transfer proposal, it seems unlikely that Yoon will fully endorse the program in its current form. PPP lawmaker Ahn Cheol-soo, who could be the party’s next leader, stated that it would be “irresponsible” for the ruling party to go along with Lee’s “cash-spreading populist pledges.”

Yoon may propose modifications to the cash transfer program, such as targeting it to the most vulnerable groups. Alternatively, he may seek to steer the discussion toward alternative measures that align with the PPP’s policy priorities, such as targeted support for small businesses or reforms to enhance labor market flexibility.

For his part, Lee, who will meet with Yoon from a position of strength after his party’s decisive win in the recent general elections, will likely seek to set the agenda and extract concessions from the president.

Lee could argue that his proposal is necessary and that failure to act decisively will only exacerbate social tensions and undermine public trust in the government.

However, Lee may also face pressure to demonstrate flexibility and a willingness to compromise, given that the DP does not have the votes to override Yoon’s veto.

Regardless of the decision Yoon and Lee reach during their meeting, it has the potential to impact South Korea’s ability to make long-term economic plans.

“People are becoming accustomed to receiving cash handouts from the government, even when there is no real need or capacity,” Kim from the University of Seoul said.

“If society becomes accustomed to such handouts, it erodes fiscal morals and makes it harder to enact necessary reforms, such as raising taxes or implementing unpopular policies like pension reform. This leads to a broader problem, weakening South Korea’s long-term financial sustainability and the potential for genuine welfare state development.”

Joon Ha Park and Lina Park contributed reporting to this analysis. Edited by Alannah Hill