As global monetary tightening gathers pace, Kim Yong-beom, head of the presidential policy office, has signaled that the government will channel more fiscal spending into income redistribution. "Distribution and growth do not stand in opposition," Kim wrote on Facebook on the 29th, adding that "the center of gravity in state affairs must shift, built on the strength of growth we achieved with difficulty." Kim also said the country needs "fiscal policy that looks first to the places where the warmth of recovery arrives late and that lifts up human potential again," and that "for those who lose their jobs, income and transition support must be provided generously until they move to their next job." The intent of the policy is sound, but there is concern that it could drift into cash handouts. From the People Power Party came the pointed criticism: "We hope this is not a signal that cash-scattering consumption coupons will be handed out again."
With major economies raising benchmark rates one after another in response to inflation, the worry is that expansionary fiscal policy will stoke prices further. In a report dated the 30th, the Bank of Korea warned that upward price pressure could spread across the economy as robust growth centered on semiconductors and a recovery in consumption continue. Core inflation in Korea may sustain a high rate of increase in the mid-to-high 2% range for a considerable period, the central bank said. The BOK raised its base rate for a second consecutive month on the 27th, an unusual move it attributed to price instability and other factors. Kevin Warsh, chairman of the U.S. Federal Reserve, also said in a keynote address at the Jackson Hole economic symposium on the 28th that "the current rate of price increases is worrisome," signaling the possibility of a rate hike within the year for the first time in about three years since July 2023. Earlier, the European Central Bank and the Bank of Japan raised their benchmark rates in June.
If fiscal spending is loosened excessively while the economy maintains solid growth, market interest rates will rise, increasing the debt-servicing burden on households and companies and delivering a shock to the real economy. The BOK could also fall into a vicious cycle of pushing the base rate higher still to counter inflation. What is urgently needed now is a finely calibrated mix of fiscal and monetary policy. Even if the government pursues fiscal expansion, it must concentrate the spending on support for vulnerable groups and on areas that can raise the potential growth rate. It must also examine financial risk factors closely in preparation for an era of tightening, and leave nothing undone in strengthening household debt management and stabilizing the property market.
