Discrepancy emerges between fiscal and monetary policies

Deputy Prime Minister and Finance Minister Hong Nam-ki, left, and Bank of Korea Governor Lee Ju-yeol speak with participants in a meeting at the Korea Federation of Banks headquarters in Seoul in this February file photo. Joint Press Corps

By Park Jae-hyuk

Controversy is growing over what some call a discrepancy between the nation's fiscal and monetary policies, after the central bank raised the key interest rate last week, despite the government's plan to increase its expenditures next year.

According to the Ministry of Economy and Finance, the government has decided to continue its expansionary fiscal policies, with the record-high annual state budget of 605 trillion won ($520 billion) for 2022. The amount is even larger than the sum of this year's regular budget of 558 trillion won and the two rounds of supplementary budget, collectively worth 46 trillion won.

Before the Chuseok long weekend in September, a 250,000 won ($215) disaster relief stimulus will be distributed to 88 percent of the population, as part of the government's efforts to support the economic recovery of needy households amid the resurgence of the COVID-19 pandemic.

In contrast, the Bank of Korea (BOK) hiked the key rate to 0.75 percent from 0.5 percent, Thursday, to cope with the overheated real estate and stock markets, as well as the soaring household debts.

Following the central bank tightening monetary policy for the first time in 15 months, concerns have arisen that the government's expansionary fiscal policies could become less effective.

“Distributing cash to almost the entire population amid the monetary tightening shows that the government's fiscal policies are inconsistent with (the central bank's) monetary policies,” Yonsei University Economics professor Sung Tae-yoon said. “At this moment, it would be more desirable to seek measures to support low-income earners selectively.”

Researchers at the Korea Institute of Public Finance (KIPF) analyzed the possible political intentions behind the expansionary fiscal policies, which are viewed as populist by some critics.

“In contrast to monetary policies implemented quite independently by the central bank, fiscal policies are basically established through political decision-making,” KIPF researcher Park No-wook said in report. “In order for fiscal policies to become important economic measures, systems should be reformed to rationalize the decision-making process.”

On the other hand, the government has emphasized the difference in the roles of fiscal and monetary measures.

After the BOK raised the key rate, Vice Finance Minister Lee Eog-weon told reporters that the ministry regards the recent rate hike as the outcome of the central bank's comprehensive consideration of the macroeconomic conditions.

Deputy Prime Minister and Finance Minister Hong Nam-ki also said in June that he does not think the expansionary fiscal policies are contradictory to monetary tightening, adding that government spending has its own role to play in supporting the needy to overcome the crisis.