[2022 Budget] Hong Nam-ki Refutes 'Fiscal-Monetary Policy Clash' Criticism, Says "Macroeconomic Policy Coordination Is Not Simply One-Way" (Q&A)

2022 Budget Proposal Briefing

Hong Nam-ki, Deputy Prime Minister for Economy and Minister of Strategy and Finance, is briefing on the 2022 budget proposal and the 2021-2025 National Fiscal Management Plan at the Joint Briefing Room of the Government Seoul Office in Jongno-gu, Seoul, on the 31st. Photo by Kim Hyun-min kimhyun81@

[Asia Economy Reporter Jang Sehee] Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, rebutted on the 31st the criticism that the fiscal authorities' 'expansionary fiscal policy' conflicts with the monetary authorities' tightening trend such as interest rate hikes, saying, "Macroeconomic policy coordination does not simply operate in one direction."

On the morning of the same day, Hong held a briefing on the '2022 Budget' at the Government Seoul Office and said in response to related questions, "The main purpose of the policy mix is to compose the optimal policy combination according to the situation," adding, "I think it is more effective for monetary policy and fiscal policy to appropriately share roles and provide tailored support."

Regarding the need to manage the medium- to long-term expenditure growth rate amid the government's preparation of a 'super-super budget' exceeding 600 trillion won next year, he stated, "From 2023, we need to take a gradual normalization process in line with the economic recovery trend."

Below is the full Q&A from Deputy Prime Minister Hong's main briefing and the preliminary briefing with related officials including Ahn Do-geol, 2nd Vice Minister of the Ministry of Economy and Finance.

- The fiscal expenditure growth rate is below 5.0% from 2023. Can this be interpreted as a shift to fiscal tightening in the future?

▲ We announced the fiscal growth rate for next year as 8.3%, and it is expected to increase at a level of 4-5% from 2023 onward. The expenditure growth rate of the fiscal budget is judged by considering various indicators such as total revenue growth rate, nominal growth rate, and fiscal shock index. Since the current COVID-19 situation is expected to have ripple effects continuing into next year rather than ending this year, we decided to maintain an expansionary stance. From 2023, I think we need to take a gradual normalization process in line with the economic recovery trend.

I would like to say that the medium-term fiscal plan was prepared to converge to a gradual nominal growth rate level. Major advanced countries are also actively playing a fiscal role until next year but are thinking of normalizing fiscal operations substantially from 2023 onward. If the economy fully normalizes after 2023, fiscal operations will likely be centered on such nominal growth rates. However, adjustments to appropriate expenditure growth rates are expected when preparing the annual fiscal budget and medium-term fiscal plans from time to time.

- There are also criticisms that the tax revenue forecast is overly optimistic.

▲ National tax revenue is forecasted by comprehensively considering various variables such as nominal growth rate, economic recovery speed, and tax elasticity, as well as expert opinions. The government has tried to forecast as objectively and realistically as possible. Compared to the second supplementary budget, it increases by 7.8%, and looking at the details, a significant part is due to increases in corporate tax and value-added tax from economic recovery.

Regarding the excess tax revenue from the asset market that composed this year's surplus revenue, it is expected not to occur anymore next year. The approximately 6 trillion won tax support announced by the government last week was also considered in the budget forecast. After the crisis normalizes to some extent, there has been a tendency for tax revenue to increase due to economic recovery. There were large increases in tax revenue during the International Monetary Fund (IMF) crisis and the 2010 global financial crisis. Before the foreign exchange crisis and global financial crisis, tax revenue increased by about 8%, even up to 12%, and in the following year, up to 22%, which I would like to point out.

- What is your view on the criticism of discord between fiscal and monetary policies?

▲ Coordination of macroeconomic policies does not mean that policies must operate in only one direction. The main purpose of the policy mix is to compose the optimal policy combination according to the economic situation. I think it is more effective for monetary policy and fiscal policy to appropriately share roles and provide tailored support.

- 1.8 trillion won has been allocated for small business loss compensation. Given the prolonged 4th wave, is there a possibility of a 3rd supplementary budget due to additional needs?

▲ (Vice Minister Ahn) Loss compensation for small businesses is a policy matter we are most concerned about. The 1 trillion won reflected in this year's supplementary budget is the required fund for the third quarter (July to September), and next year's budget includes the fourth quarter of this year (October to December) and the first quarter of next year (January to March). Since the situation includes the 4th level in the metropolitan area, the need for loss compensation will increase, but it is difficult to predict precisely. We have proactively reflected sufficient budget based on the related situation and are considering separate funding measures such as utilizing existing budgets and related fund surpluses. We do not think it is necessary to resort to a supplementary budget.

- Why did you use the expression 'securing a foundation for fiscal soundness' even though the national debt ratio exceeds 50% next year? The total expenditure growth rate exceeds the nominal growth rate; is 'fiscal virtuous cycle' possible?

▲ (Choi Sang-dae, Budget Office Chief) Along with the accumulation of national debt, integrated fiscal balance and GDP ratio based on total revenue and total expenditure for the year are also very important indicators for judging soundness. While playing an active fiscal role, thanks to increased tax revenue from improved economic conditions, the integrated fiscal balance will fall to the -2.6% range next year and will remain below 3% until 2025. The national debt will be 50.2% next year and in the high 50% range by 2025, but next year is seen as a turning point to lay the foundation for fiscal soundness recovery through fiscal balance improvement.

In securing fiscal soundness, efforts to reduce expenditures are important, but ultimately, we will enhance overall growth potential through early overcoming of economic crises, COVID-19 coexistence, and future-oriented investments. Based on this, it is important to maximize the activation of a virtuous cycle structure for soundness recovery through increased tax revenue.

- What are the specific plans for expenditure restructuring?

▲ (Chief Choi) The core of next year's expenditure restructuring is threefold. First, restructuring discretionary spending through a 10% expenditure restructuring. Second, additional reductions were made in four major current expenses in the public sector: special activity expenses, specific task expenses, overseas travel expenses, and business promotion expenses. Lastly, conventional subsidies and grants projects were reduced and adjusted, cutting private subsidies by about 300 billion won. Efforts were also made to restructure grants to various affiliated institutions.

- Regarding local education finance grants, with the decrease in student numbers due to population decline, the National Assembly Budget Office also pointed out the need to adjust the budget. What is your view?

▲ (Chief Choi) We are promoting institutional improvements to link education finance with general finance so that a certain portion can be used not only in elementary, middle, and high schools but also in lifelong education and vocational education.