With the Lee Jae-myung administration's push to overhaul the financial authorities scrapped in its entirety, the Ministry of Economy and Finance has been left in a difficult spot. The plan had been to spin off the budget function to create an independent Planning and Budget Office while taking over domestic financial policy functions from the Financial Services Commission, but that has fallen through.
Going forward, the reestablished Ministry of Finance and Economy will be left only with taxes among the three main tools for executing economic policy—budget, taxes, and finance. There are concerns that after the Government Organization Act is amended and the Ministry of Finance and Economy launches in January next year, it will be hard for it to play the role of the economy's control tower.
The government, the ruling party, and the presidential office held a high-level party-government meeting at the National Assembly on the 25th and decided to halt discussions on reorganizing the financial authorities and to maintain the current Financial Services Commission–Financial Supervisory Service structure.
Han Jeong-ae, policy committee chair of the Democratic Party of Korea, said in a briefing after the high-level party-government meeting, "The party-government has decided not to include in this government reorganization the separation of the Financial Services Commission's policy and supervisory functions and the creation of a Financial Consumers Agency, which we had initially planned to process as a fast-track item."
Accordingly, the government reorganization related to the Ministry of Economy and Finance and the Financial Services Commission will proceed only with the plan to split the Ministry of Economy and Finance into the Planning and Budget Office and the Ministry of Finance and Economy.
The problem is that, with this reorganization, the Ministry of Finance and Economy—the successor in effect to the Ministry of Economy and Finance—has largely lost the means to ensure it can play the role of the "economy's control tower."
Economic policy is often pursued using budget, taxes, and finance as tools. Regulation is also commonly counted as one of the "four main tools of economic policy." Budget and taxes are classified as direct tools, while finance and regulation are classified as indirect tools.
The Ministry of Economy and Finance currently holds the budget and tax levers and serves as the economy's control tower. The Lee Jae-myung administration sought to bolster the control tower's power by splitting the ministry's formidable authorities and functions in two while transferring financial policy functions to the Ministry of Finance and Economy. But with the day's decision, the transfer of financial functions is off the table.
Generally, the macro policy approaches pursued to boost the economy and stabilize prices use budget and finance, while the micro policy approaches that redistribute income and maintain market order often use taxes and regulation.
Regarding the outcome of the party-government consultation, the ministry said, "There is no change to the newly established Ministry of Finance and Economy performing the role of the economy's control tower as a deputy prime minister-level ministry," adding, "Once the Government Organization Act revision is finalized in the National Assembly, we will review ways to strengthen the overall coordination function of economic policy." It also said, "We will communicate closely with the fiscal and financial authorities to steadily advance the recovery of the livelihood economy and the building of a super-innovation economy."
Outwardly, it presented a "we're fine" stance, but the internal shock at the ministry is considerable. Internal communications were flooded with messages saying it has lost its status as the economy's control tower. Some pointed to the press notice and asked, "What measures are there to strengthen the overall coordination function of economic policy without tools and authority?"
Seok Byung-hoon, a professor in the Department of Economics at Ewha Womans University, said, "Given the potential conflicts between financial policy and supervisory functions, transferring financial functions to the Ministry of Finance and Economy was not a bad option," adding, "It is reasonable for the Ministry of Finance and Economy to pursue financial policy organically alongside taxes."
Some also say there will be no major problem in the exercise of the deputy prime minister for the economy's authority. Woo Seok-jin, a professor of economics at Myongji University, said, "Although the ministry is said to be weakened by spinning off the budget function, if the financial function were transferred, its authority would actually grow stronger," adding, "It is worth considering this from the perspective of dispersing the ministry's authority." Woo also said, "Even if the financial function does not move, the ministry's role as the economy's 'control tower' will be maintained as the core macroeconomic ministry."