Shin Hyun-song, the nominee for Bank of Korea governor, said on the 13th that the supplementary budget effect will lift this year's growth rate by about 0.2 percentage point (p).
In written answers submitted to the National Assembly's Planning and Finance Committee that day for his confirmation hearing, Shin said, "With upward pressure on prices and downward pressure on growth simultaneously intensifying due to the Middle East war, and with difficulties in vulnerable sectors mounting, the supplementary budget will help mitigate the impact of such shocks."
However, he noted, "In Korea, potential growth is declining over the medium to long term, structurally weakening the revenue base, while low birthrates and an aging population are expected to increase demand for fiscal spending," adding, "There is a need to pay attention to fiscal soundness."
Shin also said the supplementary budget will not have a large impact on prices. He explained, "The supplementary budget is being funded with excess tax revenue without issuing deficit-financing bonds, which means private funds are being redistributed from the taxpayer to government spending recipients, making it neutral for the money supply." When the money supply rises, the value of money falls and prices go up, but because the money supply is not increasing, the likelihood of inflation is small.
However, he cited prices as the most important variable in setting the benchmark interest rate. He explained the reason, saying, "If the Middle East war is not brought under control and becomes prolonged, the inflation rate will rise quickly, and the effects will gradually spread to core inflation and inflation expectations."