Government, Bank of Korea, financial regulators vow to channel revenue gains into future investment

The government, the Bank of Korea and financial regulators agreed Wednesday to direct additional fiscal room created by rising tax revenues toward forward-looking investment aimed at lifting the country's potential growth rate, while strengthening policy coordination to manage risks in vulnerable sectors and stabilize household livelihoods.

The Ministry of Finance and Economy and the Ministry of Planning and Budget said the agreement emerged from an expanded macro-fiscal-financial consultative meeting held at the Government Seoul Building. The meeting was attended by Deputy Prime Minister and Finance and Economy Minister Koo Yun-cheol, Planning and Budget Minister Park Hong-keun, Financial Services Commission Chairman Lee Eok-won and Bank of Korea Governor Shin Hyun-song.

The meeting marked the first time the Bank of Korea governor has joined what had previously been a three-institution forum. The government said it broadened the scope of the gathering to conduct a comprehensive review of macroeconomic and financial market conditions, and plans to convene similarly expanded sessions on a flexible basis as policy issues arise.

Participants assessed that the South Korean economy has broadly maintained a solid trajectory. Nominal gross domestic product in the first quarter rose 17.1 percent from a year earlier — the fastest pace since the third quarter of 1995 — driven in part by improved corporate earnings on the back of strong semiconductor performance.

The momentum carried into the second quarter: exports in May surged 53.2 percent year-on-year to an all-time high, and the current account surplus continued to widen, pointing to resilient economic fundamentals and solid external credibility, participants said.

With tax revenues expected to increase on the strength of favorable economic conditions, participants agreed that the resulting fiscal room should be channeled into future-oriented investment to raise the country's potential growth rate.

At the same time, they said fiscal policy should play a more active role in easing the burden on households from rising prices and in narrowing inequality. Participants also agreed on the need to pursue fiscal structural reform and expenditure restructuring to improve efficiency alongside the expansion of fiscal capacity.

Growing volatility in financial conditions and the strain it places on vulnerable groups were also flagged as key areas of concern. Participants agreed to closely monitor the impact on low-income and low-credit borrowers exposed to rising interest rates, small-scale self-employed workers and micro-business owners, and small and midsize importers and import processors facing exchange rate pressure, as well as leveraged investors. They pledged to strengthen inter-agency cooperation to manage these risks and support economic stability.

Participants also shared the view that coherent macroeconomic policy management becomes all the more critical during periods of rapid change in macroeconomic conditions. They agreed to deepen inter-agency cooperation in formulating the second-half economic growth strategy and in conducting policy operations going forward.