The Bank of Korea and the Korea Development Institute (KDI) are in direct conflict over the timing of the supplementary budget formulation. The two institutions, which clashed last year over the timing of interest rate cuts, are now experiencing friction over fiscal policy, leading to growing controversy. As the claims from these two think tanks in South Korea diverge, experts' opinions are also split.
According to the Bank of Korea on the 10th, Bank of Korea Governor Lee Chang-yong emphasized the need for supplementary budget preparation during the Monetary Policy Committee meeting on the 25th of last month, stating, "It is not desirable to solve all problems solely through monetary policy." Governor Lee projected that if a supplementary budget is implemented, it could raise the economic growth rate by 0.2 percentage points.
◇ Ongoing conflict between the Bank of Korea and KDI over fiscal and currency policy
Governor Lee further stated, "It is somewhat puzzling that KDI suggested that a supplementary budget is unnecessary," adding, "I believe they should explain why they believe it is not necessary." He reiterated that, considering the current economic situation, merely cutting interest rates would not be sufficient to stimulate the economy, and additional fiscal input is essential.
This statement targets KDI, which has taken a confrontational stance against the Bank of Korea. Jeong Gye-cheol, Director of the KDI Economic Forecasting Division, claimed during a press briefing at the Ministry of Economy and Finance on the 11th of last month that, "A supplementary budget can only be formulated if there are significant changes or concerns regarding domestic and external conditions like economic recession and mass unemployment," arguing that legally, the conditions for a supplementary budget have not been met. KDI maintains that early execution of the budget should take precedence over the supplementary budget.
This is not the first time the two institutions have clashed over economic policy. Last year, the Bank of Korea and KDI engaged in intense debate over the timing of interest rate cuts. KDI insisted on an urgent interest rate cut for economic stimulus, proposing the 'failure to cut interest rates' theory. In contrast, the Bank of Korea maintained a cautious stance due to concerns about financial instability and ultimately implemented its first interest rate cut only in October of last year.
During the Monetary Policy Committee meeting held on November 28th of last year, Governor Lee expressed discomfort regarding the theory of failure to cut rates, stating, "Please evaluate growth rates, price stability, and financial stability all at once a year from now." At a policy symposium co-hosted by the Korean Finance Association around the same time, he asserted that "it was necessary to postpone the interest rate cut by a month to stabilize household debt and the rapid increase in housing prices in the metropolitan area."
Kim Jin-il, a professor of economics at Korea University, noted, "Traditionally, the Bank of Korea believes that the costs of monetary policy are high, while KDI thinks that the costs of fiscal policy are significant, which often leads to differing opinions." He added, "The differences in the two institutions' positions on the supplementary budget have also been revealed." However, he remarked, "I believe this is a healthy conflict," stating that the political arena should consider both institutions' opinions in determining the direction and scale of the supplementary budget.
◇ Experts divided: "Urgent economic stimulus" vs. "Loans should be taken later"
Experts generally agree on the necessity of a supplementary budget but differ regarding the timing of its formulation. Some argue that the supplementary budget should be established as soon as possible, while others believe it would not be too late to implement it after early execution of the budget.
Woo Seok-jin, a professor of economics at Myongji University, stated, "Although the government has been executing quickly since January, the published economic indicators are dismal," pointing out that the effects of early budget execution are limited. He criticized, "If the Trump administration's tariff policy is further strengthened in the second half of the year, how do they plan to respond if a supplementary budget is only formulated then?"
Jo Yong-ku, a researcher at Shinyoung Securities, stated, "The economy has maintained a growth rate around 0% compared to the previous quarter since the second quarter of last year, and the first quarter of this year is expected to be similar," adding, "Although it may not meet legal requirements, it is reasonable to think that the economy is not performing well." He suggested, "Considering the overlapping political risks such as military rule and impeachment, it would be better to quickly formulate a supplementary budget."
In contrast, Kim Seong-soo, a senior researcher at Hanwha Investment & Securities, stated, "In a crisis situation, wouldn't you spend all the money you have, and if that is still insufficient, then take out a loan?" He argued, "It is right to exhaust all available means before formulating a supplementary budget." He further clarified, "It would be appropriate to first implement early execution that does not burden the treasury and to conduct the supplementary budget around the end of the second quarter."
Baek Yoon-min, a researcher at Kyobo Securities, stated, "I think the formulation of a supplementary budget is necessary," but also noted, "In terms of timing, KDI's argument is valid." He suggested, "Since the government stated it will execute 70% of the budget in the first half of the year, it would be appropriate to formulate the supplementary budget after completing that, adding, "If the supplementary budget is inputted now, there is doubt about the effect on economic stimulation due to potential budget duplication."