Repeated Money Injection Also Hinders Monetary Policy (Comprehensive)

Growing Calls in Political Circles for 'National Disaster Relief Fund'
Contradicts Government's Priority Support for Vulnerable Groups
Rising Interest Rates Suppressed Amid Self-Employed Sector Worsening

[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, opinions are emerging that the scope for monetary policy maneuvering will narrow as the possibility of increasing fiscal support for small business owners and self-employed individuals grows.

◆Supplementary Budget Also Focused on 'Universal Support,' Monetary Policy Capacity ↓= Currently, the main driver of money supply is the National Assembly. According to the National Assembly on the 15th, the ruling party has begun reviewing the second supplementary budget and continues to insist on expanding disaster relief funds to the entire population. There are even calls to increase the size of the supplementary budget. This is likely to deepen the controversy over the discord between fiscal and monetary policies. Previously, the government and the Bank of Korea stated that to dispel concerns about discord, interest rates should be raised while fiscal policy should focus on vulnerable groups, but if the direction shifts to universal payments, it contradicts the stance of fiscal and monetary authorities.

In fact, one-third of the second supplementary budget is 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 group, has been changed to a universal disaster relief fund, pouring fiscal resources into the entire population. Deputy Prime Minister Hong said, "We have decided to pay 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, and the shortfall will be reflected in next year's budget. As fiscal policy is used extensively, the capacity to operate monetary policy inevitably decreases.

◆Next Year's Minimum Wage Increase of 5%... Increased Burden on the Self-Employed= The minimum wage increase also complicates monetary policy operation. The Minimum Wage Commission decided to raise next year's minimum wage by 5.1% compared to this year, which has sparked strong opposition mainly from self-employed and small business owners. The minimum wage hike is likely to exacerbate management difficulties, and considering the rapidly increasing debt levels of the self-employed, it is expected to act as a factor restraining interest rate hikes.

However, if the fourth wave of COVID-19 fully materializes, damage will increase mainly 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 next year's minimum wage is also a burden. With concerns over sales losses for the self-employed due to strengthened social distancing measures, the minimum wage increase is expected to worsen management difficulties.

◆Fiscal Policy Should Be Targeted, 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 is allocated to disaster relief funds, while support for small business owners severely affected by COVID-19 is relatively small," adding, "Because targeted support through fiscal policy is insufficient, the capacity to operate monetary policy has decreased." He further stated, "Considering financial imbalances and inflation, it is time to raise interest rates, but fiscal policy is tying the hands of monetary policy," and predicted, "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 considering the overall macroeconomy." He said, "Support for damages in certain industries due to social distancing measures should be addressed through fiscal policy," and added, "We should move toward reducing quantitative easing through interest rate hikes while actively utilizing fiscal policy."

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