From Universal Support to Minimum Wage Increase... Fiscal Policy Hindering Monetary Policy

Political Circle Moves to Expand 2nd Supplementary Budget
Government Prioritizes Support for Vulnerable Groups, Causing Conflict
Worsening Self-Employment Also Suppresses Interest Rate Hikes

[Asia Economy Reporter Jang Sehee] As COVID-19 resurges and demands for expanding the second supplementary budget increase, controversy over the discord between fiscal and monetary policies is expected to flare up again. Although the government and the Bank of Korea maintain that fiscal and monetary policies are complementary, views are emerging that the scope for monetary policy to move will narrow as the possibility of increasing fiscal support for small business owners and self-employed individuals grows.

◆ 'Populism' Second Supplementary Budget and 5% Minimum Wage Increase Next Year = On the 15th, the Bank of Korea held a Monetary Policy Committee meeting at its headquarters in Seoul and kept the base interest rate at a record low of 0.50% per annum. This came just a month after the Bank stated that normalization should occur at an appropriate time within the year, but the fourth wave of COVID-19 became a variable, signaling a red light for real economic recovery.

With political demands increasing the likelihood that the second supplementary budget (추경) will shift to universal support, the central bank’s capacity to implement tight monetary policy has effectively diminished. In fact, one-third of the second supplementary budget was allocated to the COVID-19 coexistence national support fund (disaster relief fund), while support for small business owners has relatively shrunk. The disaster relief fund, initially planned to be paid to the bottom 80% income bracket, was changed to a universal disaster relief fund, pouring fiscal resources into the entire population. Deputy Prime Minister Hong said, "We decided to provide up to 9 million won to businesses subject to gathering restrictions, and it is not easy to increase this further." Regarding the expansion of the self-employed loss compensation budget, 600 billion won has been paid in advance, with the shortfall to be reflected in next year’s budget.

However, if the fourth wave of COVID-19 intensifies, damage is expected to increase, especially among vulnerable groups such as the self-employed. According to the Bank of Korea, as of the end of March this year, the outstanding loans of domestic self-employed individuals reached 831.8 trillion won. The loan growth rate for the self-employed, which was 15.4% in June last year, rose by 3.4 percentage points to 18.8% in March this year. The 5% (440 won) increase in the minimum wage next year is also a burden. With concerns over sales losses for the self-employed due to strengthened social distancing measures, the minimum wage hike is expected to exacerbate management difficulties.

◆ Fiscal Policy Should Be 'Targeted' While Monetary Policy Should Be 'Universal' = Experts argue that monetary policy needs to be operated considering the overall macroeconomic situation. Support for vulnerable groups such as low-income households and the self-employed is more effective when provided through fiscal policy rather than interest rate adjustments.

Professor Andonghyun of Seoul National University’s Department of Economics said, "Looking at this supplementary budget, more than 10 trillion won went into disaster relief funds, while support for small business owners severely affected by COVID-19 is rather insufficient," adding, "Because targeted support through fiscal policy is lacking, the room for monetary policy operation has decreased." He further noted, "Considering financial imbalances and inflation, it is time to raise interest rates, but fiscal policy has hampered monetary policy. In the future, even a 0.5 basis point increase in interest rates will be a heavy burden for the self-employed."

Professor Jeon Seongin of Hongik University’s Department of Economics also argued, "Monetary policy should take a universal approach by looking at the overall macroeconomy." He stated, "Support for damages to certain industries caused by social distancing measures should be addressed through fiscal policy," and added, "While moving toward reducing quantitative easing through interest rate hikes, fiscal policy should be used nimbly."

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