Inflation to put new president in dilemma over stimulus spending

Shoppers pass by a fruit vendor at a traditional market in Seoul, Monday. Yonhap

By Yi Whan-woo

Surging inflation is expected to pose a significant dilemma for the next president concerning his plan to increase government spending to boost support for pandemic-stricken small businesses, irrespective of snowballing national debt.

The implementation of the plan has been expected regardless of the outcome of the presidential election, Wednesday, considering the two top presidential candidates ― Lee Jae-myung of the governing Democratic Party of Korea (DPK) and Yoon Suk-yeol of the main opposition ― were on the same page when it comes to the need for another round of supplementary budget spending.

The two candidates did not find it to be satisfactory and called for more spending when the National Assembly, on Feb. 21, passed an extra budget bill worth 16.9 trillion won ($13.6 billion), up 2.9 trillion won from the initial proposal made by the administration of outgoing President Moon Jae-in in January.

However, the two main candidates did not see it coming, when the global oil shock then stoked inflation further due to Russia's invasion of Ukraine and the resulting sanctions imposed by the Western powers against Moscow.

Both Lee and Yoon have promised to spend an extra 50 trillion won as a relief program.

In addition to extra budget, Lee and Yoon have promised to spend hundreds of trillions of won to improve welfare, while easing taxes on real estate, stocks and other means of investment. However, it remains unclear how they will finance all of these proposed pledges.

According to analysts, such an expansionary fiscal policy can put further pressure on consumer prices, which grew more than 3 percent for the fifth straight month in February.

The consumer prices growth rate is above the Bank of Korea's (BOK) inflation target of 2 percent, over the medium term. It is predicted the inflation could reach as high as 4 percent if the Ukraine-Russia war persists.

“It is a basic rule that the increased supply of money in circulation leads to inflationary pressure, but the case can be more extreme for the next government,” said Chun So-ra, a research fellow at the Korea Development Institute (KDI).

She pointed out that Korea's fiscal deficit has surpassed 100 trillion won and the national debt has soared to 240 trillion won ― over seven rounds of supplementary budgets ― including the one in February under the Moon administration so as to cope with fallout of the pandemic.

“It's hard to tell whether the new administration will issue treasury bonds or take other relevant measures to fund the budget. But no matter what, the extra spending will make it tougher to manage inflation and attain an economic recovery at the same time,” Chun added.

The expansionary fiscal policy of the Moon administration so far has been regarded as “out of sync” with the central bank's hikes in key interest rates in recent months, because the policy can offset the effect of the hike which is aimed at placating inflation.

Against this backdrop, a government official suggested setting the amount of extra budget “to the extent that will not undermine base rates and fuel inflation.”

According to the data from the Ministry of Economy and Finance and National Assembly Budget Office, the national debt can grow up to 2 quadrillion won by the end of the new president's term in 2027, if the total budget is covered by issuing treasury bonds.