Bank of Korea Governor Shin Hyun-song has issued a pointed warning about the government's expansionary fiscal stance, saying there is "a need to pay attention to fiscal sustainability." Speaking at a press conference on the 22nd after the Monetary Policy Board voted to hold the base rate unchanged, Shin took aim at indiscriminate cash handouts in the budget. "Looking at next year's budget proposal, there are many items in the form of transfer payments, and fiscal policy must always take sustainability into account," he said. He added that "if temporary revenue sources give rise to continuing expenditures, spending items will emerge that cannot be reversed, and reversing them will not be easy." The remarks read as a message that the 162 trillion won future response fund, built up in part from excess semiconductor tax revenue, must not be abused as a pot of welfare money to be divided up. He also said of a price ceiling on petroleum products that it "could cause fiscal problems over the long term."
Shin, who until now has confined himself to general principles when discussing government fiscal policy, was unusually blunt on this occasion. He likely concluded that vote-buying welfare spending that disregards the fiscal position has reached a troubling level. Next year's government budget exceeds 820 trillion won, the largest on record. If the government insists on an all-out expansionary course, relying solely on revenue growth driven by the semiconductor boom, it will inevitably fall into a vicious cycle of rising national debt, wider bond issuance and deteriorating fiscal health. That is why Shin singled out the problem of transfer payments, cash disbursed without anything in return.
The future response fund, assembled from temporary revenue, should likewise be spent properly on sources of growth such as support for advanced industries and youth employment. Yet the detailed plans are packed with welfare items requested by individual ministries, including basic income for farming and fishing communities, a basic child allowance and culture and arts passes. Of the 45 trillion won in fund program spending for next year, 17 trillion won, or 38%, is allocated to consumption-type expenditures. On top of that, spending on major items can be changed at the government's discretion within a range of 30% without National Assembly approval, raising considerable concern that the fund amounts to a government slush purse.
The government and the National Assembly should not take the central bank governor's candid advice lightly, and should reflect it properly in policymaking and legislation. With no voices inside the government or the ruling party pointing out the side effects of expansionary finance, it takes courage to treat Shin's criticism as a red team and act on it. This is not a time to drain the national coffers as if they were a bottomless vessel, but a time to use them as precious seed money for future growth.