A study has found that if government liability in Korea increases by 1%, consumer prices could rise by up to 0.15%. In particular, it was analyzed that using expansionary policies in a state of fiscal deficit would further exacerbate price increases.
According to the Korean Fiscal Society on the 22nd, Professor Lee Jun-sang of the Department of Economics at Sungkyunkwan University, researcher Jang Seong-woo, and associate researcher Lee Hyeong-seok at the Bank of Korea published a paper titled "The Impact of Fiscal Soundness on Prices" in the May issue of Fiscal Studies.
The research results indicated that as the primary balance worsened and government liability and expenditure increased, consumer prices statistically significantly rose.
Researchers forecasted that if government liability increases by 1.0%, the consumer price index is expected to rise by up to 0.15%.
This effect is particularly stronger during fiscal deficits. While a rise in liability during a fiscal surplus only led to a temporary increase in prices, in a fiscal deficit situation, it caused a larger and more prolonged rise in prices.
The key pathway through which fiscal policy affects prices was "expected inflation."
When the government excessively increases expenditure or liability, households start to expect that prices will rise further in the future, and this expectation acts as a factor that actually drives up prices.
They confirmed in this study how the price reacts depending on how much the government takes on debt. This approach differs from existing research that analyzes the impact of fiscal policy on economic growth rates.
The analysis targeted monthly indicators from October 2000 to November 2023, including government liability (national treasury bonds + rice bonds + national housing bonds + foreign bonds), government expenditure, and primary balance (consolidated fiscal balance - interest expenditure).
They believe policymakers should consider the impact of fiscal operations on the formation of economic agents' expected inflation.
They suggested that "the fiscal authorities should design policies considering that fiscal policy and fiscal soundness can cause inflation" and "they must recognize that improving fiscal soundness is also an important factor in price stability."
They also added that "expansionary fiscal policy without improved fiscal soundness could cause long-term inflationary phenomena."
The results of this study are understood to mean that the Lee Jae-myung government, which decided on bold fiscal inputs due to concerns about an economic downturn, must pay special attention to price increases.
According to the new government's supplementary budget plan announced on the 19th, this year, government expenditure will increase from 673.3 trillion won to 702 trillion won, leading to a consolidated fiscal balance deficit of 59.6 trillion won.
The government will need to issue an additional 19.8 trillion won in government bonds, increasing the government debt from 1,273.3 trillion won to 1,306.6 trillion won. This marks the first time national debt has surpassed 1,300 trillion won. The debt-to-GDP ratio will also rise to 49.0.
The government recognizes price stability as the top priority for people's livelihoods and is focused on preparing measures. President Yoon Suk-yeol directed the preparation of measures on the 9th, saying, "The price issue is causing too much pain to our people." The government is identifying tasks for price stabilization, focusing on food.