(Korea Times EDITORIAL Jan. 17)

Policy mismatch
Monetary and fiscal policies must go hand in hand

Monetary and fiscal policies must go hand in hand to maximize their effects. Imagine what will happen if they move in the direction of the opposition.

An example of policy mismatch occurred on Friday when the Bank of Korea (BOK) hiked policy interest rates and the Ministry of Economy and Finance proposed an additional budget bill. of 14 trillion won ($11.8 billion). Raising the rate by 0.25 percentage points to the pre-pandemic level of 1.25% was aimed at controlling inflation and curbing soaring household debt. However, this contradicts the government’s fiscal expansion.

The effects of the BOK’s monetary tightening could be offset by the government’s expansionary fiscal policy. This mismatch could also undermine overall policy coherence and consistency, sending a confusing signal to the market.

Still, Economy and Finance Minister Hong Nam-ki argued that the rate hike and the supplementary budget plan are not contradictory but complementary. Of course, there is a need to provide more financial support to those most vulnerable to the fallout of the protracted pandemic.

But the supplementary budget proposal appears to be politically biased in the run-up to the March 9 presidential election. The plan came a day after President Moon Jae-in instructed his officials to draw up measures to use last year’s excess tax revenue to support small business owners and the self-employed.

The use of excess tax revenue, estimated at 60.6 trillion won, 10 trillion more than the amount previously expected, does not appear to be a problem. However, critics say the Moon administration is using populism to help ruling Democratic Party of Korea (DPK) presidential candidate Lee Jae-myung gain more support from voters.

It is wrong to use taxpayers’ money for political purposes. Lee went further, asking for an increase — by at least 25 trillion won — in the amount of the proposed supplementary budget. He even said he would push for the increase after the election unless the government agreed to his request.

Yoon Suk-yeol, the presidential candidate of the main opposition People Power Party (PPP) is no different. He said the size of a supplementary budget should reach 50 trillion won. It is disappointing for rival candidates to embark on a populist campaign to woo voters without concern for fiscal strength.

The amending finance bill should not be influenced by politics. The national debt is expected to reach a record high of 1,064 trillion won this year, equivalent to 50% of the country’s gross domestic product (GDP).

From now on, the central bank and the Ministry of Finance must hold close consultations to maximize the effects of their policies. BOK Governor Lee Ju-yeol hinted at further rate hikes down the road. Its monetary tightening should be supported by the ministry’s fiscal tightening to stabilize consumer prices, reduce runaway household debt and restore fiscal health.

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