[2nd Supplementary Budget] Despite 33 Trillion Won Injection, No Impact on Inflation... Experts Warn of "Inflation Concerns"

Deputy Prime Minister Hong Nam-ki: "Limited Impact of Fiscal Projects on Inflation"
Experts: "Private Consumption Already Recovering... Large-Scale Fiscal Spending May Shift to Asset Markets"

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is delivering opening remarks at the 12th Innovation Growth BIG3 Promotion Meeting held at the Government Seoul Office in Jongno-gu, Seoul, on the 1st. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporters Kim Hyun-jung (Sejong), Jang Se-hee] As a 33 trillion won scale of COVID-19 damage support and economic stimulus projects are being promoted through the formulation of the 2nd supplementary budget (supplementary budget), the government expects that such large-scale fiscal projects will not have a significant impact on inflation. On the other hand, experts are concerned about inflation caused by demand pressure due to excessive fiscal projects in a situation where private consumption has already entered a recovery phase.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki diagnosed on the morning of the 29th at a briefing on the 2nd supplementary budget held at the Government Complex Seoul that the possibility of inflation occurring due to the supplementary budget is limited. Deputy Prime Minister Hong said, "The GDP gap of our country is minus (-) 1.65, so the impact of the supplementary budget projects on inflation is limited." In fact, the GDP gap, which is the difference between actual GDP and potential GDP, is interpreted as indicating no excess demand pressure when negative, whereas a positive gap indicates excess demand and increased inflationary pressure. He estimated that assuming card usage for the cashback project is 10 trillion won, the impact on inflation would be about 0.03 percentage points.

Deputy Prime Minister Hong continued, "It is necessary to consider that private transfer expenditures used in the supplementary budget projects have relatively low fiscal multipliers, so their impact on inflation is quite limited," and explained, "The transmission channel through which fiscal spending affects inflation usually unfolds over about two years, or eight quarters." He added, "The impact on inflation, especially on inflation, in the second half of this year is not very large," and "We will control so that this year's inflation rate does not exceed 2%."

On the other hand, experts predict inflationary pressure from demand-side due to this government's supplementary budget projects. They explain that such large-scale consumption stimulus measures are unnecessary in a situation where private consumption is already naturally recovering.

Professor Kim So-young of Seoul National University’s Department of Economics said, "It seems possible to achieve a 4% growth rate this year even without any government measures, but if a supplementary budget project amounting to 1.7% of GDP is promoted, there is a concern about inflation," and emphasized, "Also, if the purpose of stimulating consumption is not achieved, liquidity is likely to flow into asset markets." Professor Kim pointed out, "Side effects such as movement into real estate and stocks will occur, while government debt will increase, resulting in a crowding-out effect," and said, "It is an inappropriate policy given the current economic situation."

Professor Kim Sang-bong of Hansung University’s Department of Economics also said, "Fiscal projects have a faster inflationary effect than taxes," and predicted, "Compared to monetary policy (interest rates), it takes time for money to be released and reach income, but fiscal spending will show market reactions in the short term." He added, "There is a possibility that inflation will rise sharply in the third quarter," and "If the herd immunity target is achieved in November, inflation could rise by at least 0.2 percentage points."

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