[Yoon Administration Supplementary Budget] Releasing a Record 60 Trillion Won to Control Inflation?... 'Out-of-Sync Policy'

Ahead of the June 1 Local Elections, 'Universal Support' Regardless of Losses
Concerns Over Inflation Due to Expansion of Cash Transfers... Fiscal and Monetary Policies at Odds

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Kwon Haeyoung] The Yoon Seok-yeol administration, which has prioritized price stabilization as its top task, is launching an unprecedented "money injection" by drafting an additional supplementary budget (supplementary budget) of 59.4 trillion won, the largest ever, immediately after its inauguration. Although it was justified by support for small business owners and livelihood and price stabilization, concerns are rising that nearly 60 trillion won flowing into the market will fuel the recent surge in prices. In particular, regarding support for small business owners, the direction was shifted from differentiated payments discussed during the Presidential Transition Committee period to universal payments regardless of losses, raising criticism that it was done with the June 1 local elections in mind. Criticism is also being raised about the new government's contradictory policy of releasing massive finances right after its launch while claiming to control prices.

◆ Yoon Government, Injecting 60 Trillion Won Immediately After Inauguration＝ On the 12th, the government approved the '2022 2nd Supplementary Budget' worth 59.4 trillion won at an extraordinary Cabinet meeting. If the supplementary budget of 59.4 trillion won drafted by the government is realized, it will surpass the previous largest scale, the 3rd supplementary budget of 2020 (35.1 trillion won). Even excluding local transfer expenditures from the expected excess tax revenue of 53.3 trillion won this year, a total of 36.4 trillion won will be used as supplementary budget funds, marking the largest scale in history.

The government allocated ▲26.3 trillion won for support to 3.7 million self-employed and small business owners by providing at least 6 million won regardless of losses ▲6.1 trillion won for strengthening quarantine measures ▲3.1 trillion won for livelihood and price stabilization ▲1 trillion won for reinforcing contingency funds. Considering that 23 trillion won, which will be allocated as local grants according to the National Finance Act, will also be spent by local governments in the future, a total of 60 trillion won will be newly injected into the market.

The problem is that such large-scale government spending could further push up prices, which are on the verge of breaking through the 5% increase rate. In a situation where energy and grain prices are soaring due to the Ukraine war, cash transfers directly given to small business owners are more likely to stimulate prices compared to other fiscal expenditures. This could lead to "excess consumption → demand stimulation → inflationary pressure."

◆ Contradiction in Policies: Drafting the Largest Supplementary Budget While Claiming to Control Prices＝ As the Yoon Seok-yeol government declared "price stabilization" as its top priority and drafted a supplementary budget close to 60 trillion won, some criticize that the new government is producing contradictory policies from the start. This also contrasts with the Bank of Korea's monetary tightening stance. Earlier, President Yoon said at the first Chief Secretary meeting held the day before, "The economy is very difficult right now," and "The biggest problem is prices, so we need to keep thinking about the causes of price increases and suppression measures." He also ordered concerns and countermeasures regarding the 'stagflation' situation where prices rise amid economic recession.

In particular, the government included price stabilization measures in this supplementary budget due to inflation concerns, but ironically, the supplementary budget could push prices up. According to the supplementary budget, the government allocated 300 billion won to support stabilization of living prices. Specifically, 54.6 billion won was assigned to temporarily support 70% of the price increase costs from the national treasury on the condition that domestic flour milling companies minimize price hikes. Loan support for dining businesses to purchase ingredients and renovate facilities was expanded by 15 billion won, and the applied interest rate was lowered by 0.5 percentage points compared to before. However, 26.3 trillion won was poured into small business owner support, which is highly likely to push prices up through cash transfers, regardless of losses.

Another problem is that if prices rise, low-income and vulnerable groups could be hit harder. Although there is a short-term effect of increasing disposable income for vulnerable groups, in the mid to long term, if prices rise due to expanded transfer payments, the burden on vulnerable groups will increase further.

Regarding this, Choi Sang-dae, 2nd Vice Minister of the Ministry of Economy and Finance, said, "Transfer payments may have some impact on prices, but compared to government consumption and investment, the impact is limited to one-third to one-fifth," and added, "Right now, support for small business owners and low-income groups who are suffering from the COVID-19 recovery process and high prices of goods and energy is more urgent." He also stated, "We will prepare policies such as harmonizing the supplementary budget and price stabilization measures to minimize the impact on prices."

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