Over-the-top fiscal expansion is not answer
In an alarming development, consumer prices rose 3.8 percent on year in October. That’s the highest surge in seven months, after 4.2 percent in March. The spike primarily resulted from soaring international oil prices from the Middle East conflict and the rising agricultural prices, including those of fruits and vegetables, due to abnormally low temperatures. On Thursday, Deputy Prime Minister for Economic Affairs Choo Kyung-ho pledged to “activate a special pan-government system” to help stabilize prices. He also announced a plan to support the working class’s heating costs during winter.
But Choo based such measures on the Bank of Korea’s projection of next year’s inflation at 2.4 percent and international oil prices at $84 per barrel. If the petroleum prices reach $90 soon, the central bank must revise its earlier projection for the inflation rate.
The textbook prescriptions to control prices are to lift the central bank’s base rate and cut government spending. But such monetary tightening can hardly be enforced, as it will lead to a recession. If the government decides to increase spending, it can fuel inflation this time. At an emergency meeting with citizens at a cafe on Wednesday, President Yoon Suk Yeol expressed concerns about more government spending, as it fuels inflation. He is not entirely wrong, given the need to tighten our belts in the face of hostile external factors.
But if the government decides to cut spending over the top, it betrays its obligation to protect the economy. It must spend money wisely — protecting the vulnerable, reforming our economic fundamentals and bolstering new industries even while maintaining fiscal integrity. The government’s decision to increase next year’s total expenditure by merely 2.8 percent reflects such agony.
In a press conference Thursday, Democratic Party (DP) leader Lee Jae-myung proposed that the government reach 3 percent growth next year through fiscal expansion — or spending money on promoting research and development, finding new growth engines and investing in infrastructure to help spur consumption. Some conservative economists even mentioned the need for the government to spend more for the economy.
But such fiscal inputs must not stimulate prices or shake the government’s principle of maintaining fiscal soundness. Fiscal health matters because it is directly connected to Korea’s national credit rating. The International Monetary Fund highly evaluated the Yoon administration’s focus on upholding fiscal integrity. During the past administration, the DP expanded our national debt by 400 trillion won ($298.3 billion). If it feels any sense of guilt, it must stop demanding a fiscal expansion.