[Q&A] Hong Nam-ki: "Fiscal and Monetary Policies Are Not Always Unidirectional... Policy Mix Is Important"

Announcement of '2021 Second Half Economic Policy Directions' on the 28th
Cash 3-Package Support for Citizens, Small Business Owners, and Win-Win Consumption Grants Released

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is announcing the economic policy direction for the second half of the year at the Government Seoul Office Building on the 28th. / Photo by Moon Ho-nam munonam@

[Asia Economy Reporters Jang Sehee and Moon Chaeseok] Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated, "I believe fiscal and monetary policies do not always move in the same direction."

Deputy Prime Minister Hong made these remarks on the 28th during the '2021 Second Half Economic Policy Direction Briefing' held at the Government Seoul Office Building. He explained, "The growth potential and consumption power of our economy have been significantly damaged," adding, "We have created various recovery measures to prevent permanent damage to consumption power."

The following is a Q&A with Deputy Prime Minister Hong

▲There are concerns about conflicts between fiscal and monetary policies.

=Some have raised issues regarding the policy mix as the monetary authorities have mentioned interest rate hikes in various contexts. I believe fiscal and monetary policies do not always move in the same direction. It is important to coordinate and harmonize policy tools appropriately according to the economic situation. The Bank of Korea seems to be expressing opinions considering accumulated financial imbalances or capital concentration in asset markets during the process of overcoming the COVID-19 crisis. On the other hand, our economy's growth potential and consumption power have been significantly damaged. Private consumption decreased by about 5% last year, and despite policy measures this year, it seems challenging to recover the 5% decline in consumption from last year. We have created various recovery measures to prevent permanent damage to consumption power. Also, crisis recovery and support for low-income and vulnerable groups are policy areas that the fiscal authorities must fully handle. However, to prevent market confusion, we will ensure that fiscal measures and various actions by the monetary authorities are well coordinated.

▲There are concerns that inflation may arise due to increased fiscal spending.

=I believe the impact of increased fiscal spending, including this supplementary budget, on the Consumer Price Index (CPI) will be limited. First, from the demand side, there is a significant negative output gap in GDP. It is expected to be around -1.6% to -1.7% this year, which needs to be considered. A large portion of the funds comes from transfer payments such as national support funds and damage compensation. Private transfer payments have relatively low fiscal multipliers, so their impact on prices is expected to be quite limited. Also, the transmission channel through which fiscal spending affects prices generally unfolds over about two years (eight quarters). The impact on inflation, especially in the second half of this year, is not significant.

▲Difficulties are expected in setting criteria for the youth-tailored asset formation support project. What are the specific design plans?

=The government has made special efforts regarding youth employment, youth housing, and youth asset formation. This includes interest support on savings or income deductions. We have prepared a package supporting youth asset formation in various forms. However, since youth support is not considered comprehensive, we are reviewing additional policies. It is expected to be completed around July.

▲Does the Special Act on National Core Strategy include only semiconductors and secondary batteries?

=Moon Seung-wook, Minister of Industry) We are preparing a special law to systematically support national core strategic industries among related ministries. We are reviewing specific targets, support criteria, and workforce training and management plans. We are planning to link related laws such as the Restriction of Special Taxation Act to provide support. Semiconductors, batteries, and vaccines have been designated as national strategic technology target industries. However, the scope of targeted industries may expand in the future according to the criteria.

The following is a Q&A with Lee Ok-won, First Vice Minister of the Ministry of Economy and Finance

▲Cashback excludes department stores, luxury goods, and durable goods consumption, which may cause reverse discrimination due to differentiated consumption places. Also, for those with credit ratings below grade 6, card issuance is difficult, raising fairness issues. Are there any measures to address this?

=Credit card cashback is a consumption stimulation measure. The point is to convert remaining consumption capacity, such as household savings, into consumption. Consumption patterns show that areas like department stores and luxury goods had good consumption even during COVID-19. Raising consumption in these areas is not the policy goal. The goal is to increase sales in areas heavily affected by COVID-19, such as local markets and self-employed businesses. Not only credit cards but also check cards are eligible, and about 96% of the economically active population use cards. For the remaining 4% who lack consumption capacity, income support is needed rather than consumption stimulation. We are separately devising income support programs for them.

▲The cashback target is stated as all cards, but how does the cashback method work? Is 10% of the total excess spending refunded from a specific card, or does the government return cash to the citizen's account?

=For example, if I designate one main card among several companies like Card A, B, and C, the main card company collects card usage details from other card companies and integrates them at the individual level. For example, information related to my average consumption in the second quarter will be gathered. Then, the main card company collects information from the second and third card companies and informs the individual consumer. Using this information, one can compare how much consumption has increased. The cashback will accumulate on the main card of the main card company, adding a certain amount of money.

▲The Bank of Korea has made an interest rate hike within the year a foregone conclusion, raising concerns about mismatches between fiscal and monetary policies. With macro indicators recovering rapidly, is the supplementary budget really necessary now?

=We will explain the supplementary budget separately. Currently, fiscal support is needed for disaster response, COVID-19, quarantine, vaccine supply, employment, and other areas. Since the so-called 'K-shaped' polarized recovery is ongoing, many people affected by COVID-19 still face difficulties. Especially, the employment market has not yet recovered, so continuous support is deemed necessary.

▲Has there been a precedent for comprehensive measures on youth employment, housing, and asset formation in the second half economic policy direction (Ha-gyeong-bang)?

=Rather than whether there was a precedent, we consider the problems or tasks that need to be solved when implementing the Ha-gyeong-bang policy. Youth issues attract significant attention in our society and are priorities for the government to address. Therefore, we have comprehensively considered youth employment, housing, and asset formation. Especially regarding asset formation, considering various situations, we judged that government measures are very important and have prepared them carefully.

This content was produced with the assistance of AI translation services.