Overcoming Water Shortage and Inflation, Public Funds of '15 Trillion+α' Injected [Second Half Economic Policy]

2023 Second Half Economic Policy Direction
2 Trillion KRW to Public Institutions, 13 Trillion KRW Additional Policy Finance Investment
"Supporting Economic Recovery Through Resource Investment"
300 Trillion KRW in Government Bonds, One-Third Reduction in KEPCO Bonds and Long-Term Corporate Bonds

A street in Insadong crowded with foreigners. The photo is unrelated to the article content. Photo by Jinhyung Kang aymsdream@

The government will inject more than 15 trillion won in additional public funds in the second half of this year. This decision is interpreted as considering an economic rebound in the second half despite concerns about tax revenue shortages and rising inflation. However, the government remained tight-lipped about how to resolve the deepening tax revenue shortfall. In the funding and bond sectors, it was decided to reduce government bonds and Korea Electric Power Corporation (KEPCO) bonds to stabilize the market.

On the 4th, the government announced the 2023 ‘Second Half Economic Policy Direction’ containing these details.

"Supporting Economic Recovery by Injecting Public Funds... Inflation Will Not Rise Significantly"

According to the plan, the government will additionally spend 2 trillion won from public institution resources in the second half. Public institutions will be encouraged to fully execute their scheduled investment plans for this year and to bring forward next year’s projects for early execution. The Ministry of Economy and Finance plans to reflect early execution performance when evaluating the financial performance of public institutions. The policy finance supply plan, which was about 229 trillion won, will be increased by 13 trillion won to 242 trillion won. For private investment projects, large-scale new projects worth up to 7 trillion won will commence in the second half, aiming to achieve this year’s investment target of 4.35 trillion won.

The government explained that this decision was made after comprehensively considering macroeconomic conditions such as tax revenue and inflation. Expanding public funds usually increases fiscal spending and exerts upward pressure on inflation. As of May, the tax revenue shortfall reached a record high of 36.4 trillion won, and inflation, which had soared, has barely dropped to 2.7% after 21 months. Excessive fund injection could worsen the serious tax revenue shortage problem and re-stimulate inflation that was barely controlled. The target figure of ‘15 trillion won plus alpha’ was set to minimize such side effects.

The government is injecting additional funds of 15 trillion won plus alpha to support economic recovery. Although the domestic economy was sluggish in the first half, the government predicts a relatively strong rebound in the second half. Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho has consistently expressed expectations of a “low start and strong finish.” It is interpreted that there is a consensus that for the economy to actually rebound in the second half as expected, the role of the public sector must expand alongside revitalizing private sector activity.

The judgment that tax revenue and inflation will not worsen as much as feared even with the injection of public funds also played a role. When the government announced the ‘2023 Economic Policy Direction,’ it mentioned focusing on price stability for the time being. However, this time it announced that macroeconomic policies will be implemented “while paying attention to price stability.” Unlike before, when lowering inflation was the top priority, it now means that inflation has been somewhat controlled. First Vice Minister of Economy and Finance Bang Ki-sun said, “There are many uncertainties, so we will continue to pay attention to price stability,” but also added, “We think inflation will not rise significantly.”

The government also holds the position that the tax revenue shortfall problem can be resolved. The government announced that it will conduct a tax revenue re-estimation from late August to early September and will utilize surplus funds such as global surplus and funds to ensure smooth execution of livelihood budgets. Local governments also plan to use a net global surplus of 16 trillion won and an integrated fiscal stabilization fund of 12 trillion won to smoothly execute budgets for regional economic vitality and livelihoods. Measures such as reinvestment of bid price differences into SOC (social overhead capital), early input of private compensation funds, and year-end extension of temporary national contract exceptions were also introduced.

However, no specific tax revenue securing measures were presented. When asked how much of the tax revenue shortfall could be managed, Vice Minister Bang replied, “I don’t think it is the stage to talk about specific numbers for securing tax revenue,” and said, “We believe that the currently short tax revenue can be mobilized as much as needed, so there is no need to worry about that issue.”

Government Bonds Reduced by 30 Trillion Won, KEPCO Bonds and Long-Term Bonds Cut by One-Third

Meanwhile, the government will also adjust supply and demand to stabilize the funding and bond markets. Typically, when the issuance of high-quality government bonds increases, market funds concentrate there, destabilizing private bond supply and demand. To prevent this, the government will reduce government bond issuance by about 30 trillion won compared to the first half and cut KEPCO’s long-term bond issuance to less than one-third. The issuance limit for bank bonds was adjusted from 125% of monthly maturities to 125% of quarterly maturities to increase flexibility.

At the same time, efforts will be made to revitalize the long-term bond market for structural stability of the bond market. A representative policy is the ‘30-year ultra-long government bond futures’ scheduled to be introduced in 2024. Currently, the longest government bond futures are 10 years, and there is no ultra-long product, making it difficult for financial institutions to manage interest rate risks. The government plans to prepare an improvement plan for the evaluation of government bond specialist dealers in the fourth quarter to ensure successful introduction.

For the financial and foreign exchange markets, the government will induce the inflow of overseas investors and market advancement to expand liquidity supply. The foreign investor registration system will be abolished by the end of the year, and foreign currency bonds will be issued with a limit of 2.7 billion dollars within the second half.