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Disaster relief fund did not boost consumption

Posted August. 24, 2020 07:30,   

Updated August. 24, 2020 07:30


Some suggest their concern on the effect of the first disaster relief fund amid heightened demand on the second relief fund among politicians.

According to the Ministry of Economy and Finance, the government spent 14.3 trillion won (including 2.1 trillion won in local government funding) to provide the first disaster relief fund up to one million won per household in May. It increased the average monthly household income (two or more members) by 4.8 percent year-on-year in the second quarter of the year. It is because public transfer income including the disaster relief fund sharply increased by 127.9 percent even though the income earned by each household such as earned, business and property income decreased.

The government spent more than 14 trillion won despite the financial burden to boost domestic consumption. But analysts say that the fund did not boost actual consumption. The average propensity to consume (APC) in the second quarter was 67.7 percent, which is 2.5 percent down from the same period of last year. That means households that earned one million won spent 680 thousand won this year, while they spent 700,000 won last year. The total transfer income of households increased by 440,000 won (80.7 percent) compared to last year, consumption only increased by 77,000 won (2.7 percent).

Low income classes cut their consumption even more sharply. The APC of the bottom 20 percent income group decreased by 9.3 percentage points, while the top 20 percent decreased only by 1.3 percentage points. Ordinary citizens saved their income when their earned income decreased even though the government fund temporarily increased their income.

Experts say that the government should contemplate on more effective policies than the second disaster relief fund whose effect is unclear compared to the enormous financial burden. “The effect of the disaster relief fund is limited compared to the financial cost,” said Kim So-young, Professor of Economics at Seoul National University. “The government should save financial resources to prepare for the time when COVID-19 dies down rather than providing more relief fund.”

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