March. 9. 2022
Inflation will put the new president in the dilemma of stimulus spending
|Shoppers walk past a fruit vendor at a traditional market in Seoul on Monday. Yonhap|
By Yi Whan Woo
Soaring inflation is expected to pose a significant dilemma for the next president over his plan to increase government spending to bolster support for pandemic-hit small businesses, regardless of the national debt snowball effect.
Implementation of the plan was expected regardless of the outcome of the presidential election on Wednesday, given the two main presidential candidates ― Lee Jae-myung of the ruling Democratic Party of Korea (DPK) and Yoon Suk-yeol of the main opposition ― agreed on the need for a new round of additional budgetary expenditure.
Both candidates found this unsatisfactory and called for more spending when the National Assembly on February 21 passed a supplementary budget bill worth 16.9 trillion won (13.6 billion), up 2.9 trillion won from the initial proposal made by the administration of incumbent President Moon Jae-in in January.
However, the two leading contenders did not see it coming, when the global oil shock subsequently stoked inflation due to Russia’s invasion of Ukraine and subsequent sanctions imposed by Western powers against Moscow.
Both Lee and Yoon have pledged to spend another 50 trillion won on a relief package.
In addition to a supplementary budget, Lee and Yoon promised to spend hundreds of billions of won on improving welfare, while lowering taxes on real estate, stocks and other means of investment. However, it is still unclear how they will fund all of these proposed engagements.
Analysts said such expansionary fiscal policy may put further pressure on consumer prices, which rose more than 3% for the fifth straight month in February.
The rate of consumer price growth is above the inflation target of 2% set by the Bank of Korea (BOK) over the medium term. Inflation is expected to reach 4% if the war between Ukraine and Russia persists.
“It is a rule of thumb that increasing the supply of money in circulation leads to inflationary pressures, but the case may be more extreme for the next government,” said Chun So-ra, a researcher at the Institute. Korea for Development (KDI).
She pointed out that Korea’s budget deficit had exceeded 100 trillion won and the national debt had climbed to 240 trillion won – over seven rounds of supplementary budgets – including February under the Moon administration to make in the face of the fallout from the pandemic.
“It is unclear whether the new administration will issue treasury bills or take other relevant measures to fund the budget. But either way, the extra spending will make it more difficult to manage inflation and the recovery. economic at the same time,” Chun added.
The Moon administration’s expansionary fiscal policy has so far been seen as “out of step” with the central bank’s key interest rate hikes in recent months, as the policy can offset the effect of the hike that aims to appease inflation.
In this context, a government official suggested fixing the amount of the supplementary budget “as long as it will not undermine base rates and fuel inflation”.
According to data from the Ministry of Economy and Finance and the National Assembly Budget Office, the national debt may reach 2 quadrillion won by the end of the new president’s term in 2027, if the total budget is covered by the issue of Treasury bonds.