Bank of Korea Governor Shin Hyun-song has publicly escalated his warnings over the government's expansionary fiscal stance. Noting that global long-term interest rates are rising structurally amid expanding artificial intelligence investment, he said spending increases funded by temporary revenue may prove difficult to reverse, and called on the National Assembly to conduct a strict budget review. The remarks underscored fiscal soundness at a time of growing concern in international financial circles that surging government debt could narrow the room for monetary policy.
Shin said at a press briefing on the 22nd, immediately after the BOK held its base rate at 3.00%, that "we must always think about fiscal sustainability." The comment drew attention because it came amid persistent criticism of a mismatch between the current government's expansionary fiscal policy and the BOK's tight monetary policy.
Behind Shin's reference to fiscal sustainability lies the rise in global interest rates. "Hyperscalers investing in AI-related projects such as data centers have also entered the long-term corporate bond market to secure long-term funding, creating a structure in which they compete with treasury bond issuance," he said. Demand for funds for AI investment and other purposes is pushing up long-term rates, he explained.
Rising long-term rates can increase the government's bond issuance costs and interest burden, constraining its fiscal capacity. There are also concerns that growing government debt could make the government reluctant to accept rate increases or press for accommodative monetary policy, undermining central bank independence.
Shin also stressed that the appropriateness of fiscal spending should not be judged by its short-term effects on growth and prices alone. Next year's budget, the first to exceed 800 trillion won, is estimated to lift gross domestic product by about 0.5 percentage points and the inflation rate by about 0.06 percentage points, but he said the government should not be complacent about fiscal management simply because the price impact is small.
In particular, he said the fiscal burden could grow if spending is raised on the back of a temporary increase in tax revenue and programs cannot be scaled back after revenue conditions deteriorate. "When designing spending, we need to consider how easy it is to reverse," Shin said. "Ultimately, the National Assembly must conduct this review strictly." On the oil price ceiling, he also noted side effects, saying it "has a temporary effect in curbing prices, but if it lasts too long, distortions arise in the price structure and it becomes a burden on public finances."
A senior financial industry official said the governor's remarks may be at the level of general principle, but added that "if rates stay structurally high, the government's interest burden will grow and the room to operate monetary policy could also narrow." The official said the comments "read as meaning that the sustainability of spending should be examined while fiscal capacity still exists."
Meanwhile, as government bond yields have surged on concerns over rising debt in major countries including the U.S. and France, arguments that central banks should speak out more actively are also spreading. The Official Monetary and Financial Institutions Forum (OMFIF), a British financial policy think tank, recently said central banks should speak out actively on fiscal issues.