[12·4 Cabinet Reshuffle] Choi Sang-mok's 2nd Term Economic Team... Challenges in 'Inflation, Domestic Demand, and Fiscal Policy'

President Yoon Suk-yeol has nominated Choi Sang-mok, former Senior Secretary for Economic Affairs at the Presidential Office, as the new Deputy Prime Minister and Minister of Economy and Finance, raising expectations that policy efforts will focus on price stabilization and economic recovery. With the possibility of the year-end inflation rate remaining in the 3% range increasing, there is an urgent call for economic policies to minimize the impact of high inflation and high interest rates.

On the 4th, President Yoon reshuffled his cabinet, nominating former economic secretary Choi as the new Deputy Prime Minister and Minister of Economy and Finance. Choi said, "Given the challenging external economic conditions, I feel a heavy responsibility as the nominee for Minister of Economy and Finance, embodying the phrase 임중도원 (Imjungdowon: a heavy responsibility and a long road ahead). I will sincerely participate in the National Assembly's confirmation process."

The Presidential Office introduced Choi as a top economic policy expert with knowledge and insight across macro-finance and the overall economy. He is regarded as the right person to address pressing economic and livelihood issues such as inflation and employment, as well as to fundamentally improve the structure of the Korean economy.

Economic experts emphasize that under the second-term economic team centered on Choi, stronger additional measures for price stabilization are necessary. According to Statistics Korea, the inflation rate slowed from 5.2% year-on-year in January to 2.3% in July but has risen for three consecutive months to 3.8% as of October. Although the government has been focusing on price stabilization by activating a pan-government special price stabilization system last month, external uncertainties remain. While international oil prices and the won-dollar exchange rate, which had driven inflation, have recently stabilized, leading to expectations of a gradual reduction in the inflation rate, concerns persist that the overall rise in prices of manufactured goods will cause the perceived inflation to continue significantly into next year.

Raising the economic growth rate is also a key task. Both the government and the Bank of Korea forecast this year’s growth rate at 1.4%, as domestic consumption is shrinking. In fact, last month’s indicators of industrial production, consumption, and investment, which reflect the overall economic trend, all declined simultaneously, indicating the need for measures to boost domestic demand.

[Image source=Yonhap News]

Legislating Fiscal Rules Remains a Challenge

However, maintaining sound fiscal management while pursuing growth and recovery in domestic demand and exports remains critical. The Yoon administration has consistently stated it will not prepare supplementary budgets to boost growth. Since Choi served as economic secretary in the first-term economic team, it is unlikely that the government will drastically change its sound fiscal policy stance even with the general election approaching.

Legislating and adhering to fiscal rules is also a challenge. The fiscal rules being promoted by the Ministry of Economy and Finance focus on managing the deficit in the management fiscal balance within 3% of the Gross Domestic Product (GDP). However, according to the 2024 budget announced by the ministry, this indicator is expected to reach 3.9%. Although this is due to unexpected tax revenue shortfalls and difficult national circumstances, there has been significant criticism that the government failed to meet the standards it proposed itself. Attempts to legislate fiscal rules are currently stalled at the National Assembly.

The ministry must also restore its credibility after tax revenue forecast errors. The Ministry of Economy and Finance recorded tax revenue forecast errors of 17.8% in 2021 and 13.3% last year. Considering that the average error rate has been around 4% since 2000, this represents a significant deviation from expectations. This year, too, corporate tax revenue has fallen short of projections, making double-digit tax revenue forecast errors almost certain. If tens of trillions of won in tax revenue forecast errors continue into next year, it will be difficult for the government to avoid criticism that its tax revenue estimation function is broken.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics emphasized, "The most important thing in our current economic policy is to focus on price stabilization to alleviate the difficulties felt by the public, and to implement policies that can raise the economic growth rate along with structural reforms in the labor market and other areas."