Shin Hyun-song, Governor of the Bank of Korea, addressed concerns on October 22 regarding the potential misalignment between the government's expansionary fiscal policy and the central bank's tightening monetary policy. He emphasized that the assessment should depend on the nature of fiscal spending. However, he noted that increasing spending with temporary funds could burden fiscal soundness.
During a press conference following the Monetary Policy Committee meeting, Shin stated, "Even if resources are limited, if investments can enhance future growth rates, fiscal spending for investment may not conflict with monetary policy." He cautioned, however, that "in the short term, it could contribute to rising prices," urging careful consideration of profitability and other factors.
Shin assessed that the government's budget proposal for next year would have a limited impact on the economy and prices. He explained, "The budget includes a significant amount of transfer payments, which have a fiscal multiplier of about 0.2, meaning their impact on GDP is not substantial."
He further elaborated, "Considering all these factors, the budget's effect on economic growth is estimated to be around 0.5 percentage points, while its impact on inflation is about 0.06 percentage points," attributing the relatively low inflation impact to the inclusion of low-multiplier items.
However, he stressed the need for vigilance regarding fiscal sustainability. Shin remarked, "Just because the fiscal multiplier is low does not mean we can be complacent. If ongoing expenditures arise from temporary funds, we must pay special attention to fiscal sustainability."
He expressed concern that once fiscal spending is increased, it is challenging to reduce. "If it leads to ongoing expenditures, there will be items that cannot be reversed, and even if we try to revert them later, it will be quite difficult," he said. "When designing such expenditures, we must also consider how easily they can be reversed in the future."
He added, "Otherwise, concerns about fiscal sustainability may arise. I believe the fiscal authorities are closely monitoring this, and ultimately, the National Assembly must conduct a rigorous review."
* This article has been translated by AI.
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