Budget brinkmanship just business as usual

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Budget brinkmanship just business as usual

As if brinkmanship is what is required for taking decisions, Korea’s lawmakers find themselves again in a last-minute rush to pass the government’s 2014 spending bill to avert stunting an economic recovery that is finally gathering steam.

Locked in a months-long battle over issues like reform of the intelligence agency, the ruling Saenuri Party and the main opposition Democratic Party struck a deal in early December to ensure that a budget will be ratified by the end of the year.

Backs-to-the-wall budget ratification has become something of an annual ritual for the country’s parliament, which didn’t pass the 2013 budget until the early hours of Jan. 1.

The protracted strife between the two key parties kept the 2014 spending bill, submitted to parliament in October, languishing without substantive review. This prompted a warning from the government that entering the new year without a budget could create a “black hole” that could undermine the ongoing recovery for Asia’s fourth-largest economy.

The economy has picked up momentum in recent months, with sequential gross domestic product growth at a seasonally adjusted 1.1 percent during the third quarter. The central bank’s index measuring consumer sentiment rose to a 33-month high in November, suggesting improving domestic demand in conjunction with a gradual rebound for exports.

“As the ruling party, Saenuri will pass the budget within this year to ensure that we do not face an unprecedented crisis of a government operating on a provisional budget,” Saenuri floor leader Choi Kyung-hwan said at a party leadership meeting on Dec. 12.

In the absence of a ratified budget, the government is constitutionally empowered to fund essential functions and ongoing projects via a so-called provisional budget based on expenditure levels from the previous year. If there is no budget passed by Jan. 2, the first working day of 2014, the government will likely operate this way.

While this will avoid a government shutdown, roughly 140 trillion won ($133 billion) of the 357.7 trillion won worth of planned spending would be frozen until the budget bill is passed. Various social welfare spending, including cash subsidies for the elderly, will be halted and temporary or part-time government employees will be out of work.

“Such an event could damage sentiment,” HI Investment economist Park Sang-hyun said. “The U.S. tapering issue is looming and exports have yet to stage a clear rebound; if government spending also weakens, that can only be a negative development on several fronts.”

However, odds of such a scenario materializing appears small. Lawmakers will be keen to avoid the damaging fallout from such a disruption ahead of key June provincial elections, analysts and policy makers say.

“Having to resort to a provisional budget would be a burden for even the opposition party,” a Finance Ministry official said. “There is enough time to get the budget passed before the year-end, and I think things will work out in the end.”

Investors also appear unperturbed at present. In the event that the government operates without a ratified spending bill, it cannot sell treasury bonds - which could push yields for the debt significantly lower as a result of reduced supply.

But analysts say there has not been any significant position adjustment among investors, domestic or foreign, at this point in response to a potential budget impasse.

“I don’t think foreign investors will see this as a system risk even if the budget ratification is delayed,” said Daewoo Securities fixed-income analyst Yoon Yeo-sam. “And I don’t think [lawmakers] will want to carry the political burden of such a scenario for a long enough time where it could actually become a system risk.”

Reuters

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