5.7% budget boost all about growth

Reflecting its determination to revive the economy, the government increased the total budget for next year to 376 trillion won ($361.4 billion), up 5.7 percent from this year.

In doing so, the government has decided to focus on economic growth rather than financial health.

The increased budget is part of Finance Minister Choi Kyung-hwan’s plan to stimulate the economy. When he took office in July, Choi chose to expand next year’s budget instead of making a supplementary budget this year.

Such a significant increase in the budget implies the urgency with which the government views the country’s economic situation after the Sewol ferry tragedy crippled domestic spending. It worries about a possible low-level equilibrium trap in which sluggish domestic demand leads to low growth, low inflation and excessive current-account surpluses. The budget also demonstrates the government’s commitment to maintain spending even with lagging tax revenue.

“The Korean economy is at a crossroads of another leap or low-level equilibrium,” Bang Moon-kyu, vice finance minister, said at a press conference. “Despite temporary fiscal deficits, the government will utilize fiscal policy more actively.”

The keywords for next year’s budget are economy, welfare and safety.

For job creation, the government allotted 14.3 trillion won, up from its initial 13.2 trillion won.

For women, the government plans to create 10,000 part-time jobs. It also will increase subsidies for companies that extend their retirement ages by introducing the wage peak system for 7,000 to 8,000 employees.

Under the creative economy initiative, the government will spend a total of 8.3 trillion won to support related businesses.

To encourage businesses to expand their spending on research and development, the government will allocate 1.09 trillion won, especially for the 13 core growth engines, including smart cars, fifth-generation wireless communication and convergence materials.

For small businesses alone, the government will provide more than 3 trillion won to help them boost R&D.

Last year, the Finance Ministry had planned to scale back the budget for social overhead capital (SOC), or infrastructure, in its midterm fiscal plan, but it changed its mind and expanded SOC spending by 3 percent to 24.4 trillion won.

Meanwhile, the budget for welfare will exceed 30 percent of the total budget for the first time.

According to the plan, the government allocated 115.5 trillion won for welfare benefits, which is tantamount to the sum of the budgets for defense, education and SOC.

The government will provide 7.2 million won a year for the poorest citizens, up from 6.8 million won. The number of citizens subject to subsidies will increase 170,000 to a total of 4.64 million. For households in the bottom 40 percent of the income bracket, the government will introduce energy vouchers worth 36,000 won per month to help pay for heating costs from December through February.

The national scholarship fund will be increased to 3.9 trillion won and the eligibility ceiling will be raised to include students from households with up to 67 million won in annual salary.

In response to the Sewol ferry disaster, the government decided to ramp up the budget for safety by about 18 percent from 12.4 trillion won to 14.6 trillion won. The increased budget will be spent on repairing bridges, railroads and school facilities.

To contain rising accidents in the military, the government will invest more for the safety of soldiers and raise monthly wages by 15 percent.

As a result, the government’s fiscal soundness is expected to erode for the next few years. The fiscal deficit is expected to widen from this year’s 1.7 percent to 2.1 percent next year. The national debt to GDP ratio also will rise from 35.1 percent to 35.7 percent, which amounts to 570 trillion won.

In the long term, the government aims to reduce the deficit ratio to 1 percent by 2018.

The Finance Ministry said it will have to tolerate the temporary worsening of the country’s financial health, but the latest expansionary budget will help the country’s economy recover as quickly as possible by creating a virtuous cycle of increasing business investment and household incomes, and encouraging consumption.

Most experts agree with the expansionary fiscal policy.

“Since the engine for economic recovery has been weakened, fiscal policy should do more,” said Bae Sang-kun, vice president of the Korea Economic Research Institute.

But at the same time, many analysts are concerned about fiscal health.

“Low fertility and fast aging will further accelerate the pace of rising welfare spending,” said Kang Byung-koo, an economics professor at Inha University. “The government’s 1 percent deficit goal by 2018 is still too optimistic.”

BY SONG SU-HYUN [ssh@joongang.co.kr]