The government plans to draw up next year's budget in the 800 trillion won range and announce it soon. It is a "super budget" that will be more than 10% larger than this year's. It will be the first time since 2009, when the global financial crisis erupted, that the budget growth rate exceeds 10%.
Experts warn that this kind of expansionary fiscal policy could fuel inflation driven by the semiconductor boom and the Middle East war. There is also a point of conflict with the Bank of Korea (BOK)'s monetary policy, which is considering additional rate hikes to counter inflation. Experts said, "Expansionary fiscal policy and tight monetary policy could work out of sync across the broader economy."
◇ Government pursues "800 trillion + alpha" budget amid 3% growth... "Overheating concerns"
Minister Park Hong-geun of the Ministry of Planning and Budget said at the national fiscal strategy meeting on the 23rd of last month, "Considering revenue conditions and the need for nationally focused investment, we will set total expenditure for next year at a record size in the 800 trillion won range, more than 10% higher than this year." This year's main budget is 727.9 trillion won. Even a 10% increase from that would be 800.7 trillion won. If the total expenditure growth rate reaches double digits, it would be the first time since 2009 (10.6%).
Economists are voicing concern over this expansionary fiscal stance. Unlike 2009, macroeconomic indicators such as economic growth and exports are strong now, while inflation concerns are high. Korea's growth rate is expected to rise to the low-to-mid 3% range this year and reach the mid-to-high 2% range next year. That is because the current account surplus is hitting record highs on the back of robust exports driven by a record-setting semiconductor boom.
Former Bank of Korea (BOK) Governor Rhee Chang-yong said in a KBS interview on the 23rd, "If next year's growth rate is close to 3%, would there really be a need to boost expenditure by 10% to prop up growth?" He added, "If the future response fund—financed by additional tax revenue—is spent in full, there is a risk of overheating the economy." He also said, "Many people say the semiconductor cycle will last more than 10 years, but because it is hard to predict, we should take a conservative view and approach."
◇ BOK raising rates says "if semiconductor bonuses are paid, prices will rise further"
There are also concerns that the government's expansionary finances could get out of sync as the Bank of Korea (BOK) raises the base rate to bring down elevated inflation. The consumer price inflation rate came in at the 3% range in May and June due to the fallout from the Middle East war and was 2.8% in July, well above the BOK's 2% inflation target.
International oil prices, which had fallen from the $100 range to the $60–$70 range on hopes for an end to the war, have recently risen again to the $80–$90 range. To lower elevated inflation, the Bank of Korea (BOK) raised the base rate in July to 2.75% from 2.5% and could hike it one or two more times within the year.
Large bonus payments scheduled early next year at Samsung Electronics and SK hynix could also push prices higher. Bank of Korea (BOK) Governor Shin Hyun-song said at a press briefing on the "review of inflation-targeting operations" in June, "Compared with last month, we judge that stronger price pressures from the demand side have emerged due to upcoming wage bargaining and wage hike demands." In a report, the BOK said, "If large-scale special bonuses are paid intensively at some enterprises, upward pressure on prices will increase significantly."
Yang Joon-seok, an economics professor at Catholic University, also said, "There would be no problem if government fiscal expenditure is focused on industries facing difficulties, but if it is injected across the broader economy, it is highly likely to stoke inflation."