Korea's COVID Fiscal Spending Low?... Countries That Spent More Saw Higher Inflation

High Fiscal Spending-to-GDP Ratios in US, UK, and Germany... Inflation Rates Generally Proportional
Political Calls for Supplementary Budgets Raise Inflation Concerns

[Asia Economy Sejong=Reporter Kwon Haeyoung] It has been found that countries with larger COVID-19-related fiscal expenditures than South Korea generally have higher inflation rates. While monetary policy by central banks, such as interest rates, is cited as the main cause, there are also concerns that large-scale government fiscal spending is pushing prices upward. Some political circles demanding an increase in the supplementary budget (추경) argue that South Korea’s fiscal spending is relatively low, but there is growing worry that expanding the supplementary budget and injecting more money could further stimulate rapidly rising inflation.

According to a review report from the National Assembly’s Budget and Accounts Special Committee and data from various national statistical agencies compiled on the 15th, from March 2020, when COVID-19 emerged, to September 2021, South Korea’s fiscal expenditure ratio to GDP was 16.5%, which is lower than that of the United States (27.9%), Japan (45.0%), the United Kingdom (36.0%), Germany (43.1%), and France (24.8%). However, inflation rates were generally lower as well.

As of December last year, when South Korea’s consumer prices rose 3.7% compared to a year earlier, the United States, with a fiscal expenditure ratio 1.7 times higher, experienced an inflation rate of 7.0%. The United Kingdom and Germany, with fiscal expenditure ratios 2.2 times and 2.6 times higher respectively, saw inflation rates of 4.8% and 5.7% (5.3% when applying Germany’s internal standards). France, with a fiscal expenditure ratio 1.5 times higher, had an inflation rate of 3.4%, similar to South Korea’s. Japan, which spent the most relative to GDP, had a relatively low inflation rate of 0.8%.

In particular, the United States, where 'direct fiscal expenditures' such as spending expansion and tax reductions?not 'indirect fiscal expenditures' like equity investments, loans, guarantees, asset purchases, or debt assumption?accounted for the largest share at 25.5% of GDP, recorded the highest inflation rate at 7.0%. The increase compared to the inflation rate in December 2019, before the COVID-19 outbreak (2.3%), was 4.7 percentage points, larger than other countries (UK 3.4 points, Germany 4.2 points, France 1.8 points). Inflation in January this year also reached 7.5% year-on-year, marking the highest level in 40 years since February 1982. The liquidity injected into the market has thus stimulated inflation. Prime Minister Kim Boo-kyum appeared on a broadcast the day before and rebutted by saying, “Other countries have spent several percent of GDP, but why don’t we? Those countries are all suffering because of inflation,” adding, “There is no such thing as a free lunch,” reflecting this background.

To make matters worse, prices of crude oil and various raw materials have surged due to the Ukraine crisis, raising concerns that South Korea and other major global countries may face difficulties controlling inflation.

In this situation, political circles are demanding an increase in the supplementary budget, deepening the dilemma for fiscal and monetary authorities. In particular, fiscal authorities see that liquidity expansion stimulates inflation and that most of the supplementary budget funds must be raised through deficit bond issuance, which could cause a sharp rise in government bond yields and further increase loan interest rates for households and self-employed individuals. The 3-year government bond yield reached 2.347% yesterday, the highest level in 7 years and 5 months since September 23, 2014 (2.350%).

Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, “Global inflation is mainly influenced by monetary policy, but if fiscal spending is carried out on a large scale, inflationary pressure inevitably intensifies,” adding, “This supplementary budget could further stimulate interest rates and inflation, making life more difficult for the public.”

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