Gov’t lowers its forecast to 2.8%
On Tuesday, the government announced it was readjusting its growth forecast for this year from 3.1 percent to 2.8 percent. Although that projection is still higher than those of other public and private analysts both at home and abroad, the government also unveiled a financial stimulus package worth 20 trillion won ($17 billion), including a 10 trillion won-plus supplementary budget, in hopes of keeping the economy from falling to the mid-2 percent growth range.
If the supplementary budget goes through, this will be the first time in Korean history that a supplementary has been used to spur the economy two years in a row.
It would also be the third supplementary budget under the Park Geun-hye administration. The first was in 2013.
This year’s supplementary budget is supposed to bolster the economy without raising the government’s debt-to-GDP ratio.
The Ministry of Strategy and Finance said other than the 1.2 trillion won that was left over from last year’s budget, the rest of the supplementary budget would be financed by tax collections that exceeded estimates.
“Last year, we had 2.5 trillion won left after our budget spending and 1.3 trillion won was used to pay treasury investors,” said Lee Ho-seung, head of the economic policy bureau at the Finance Ministry. “Now, we have 1.2 trillion won that could be used on the supplementary budget.”
The government initially estimated it would collect 222.9 trillion won in taxes this year. So far, it has collected more than its target. In the first four months, the government collected 96.9 trillion won in taxes, which is 43.5 percent of its target. The figure is also 18.1 trillion won more than the amount collected during the same period last year.
The biggest contributor has been value-added taxes, which already achieved 51.6 percent of the 58.1 trillion won target. So far, the government has collected 30 trillion won in value-added taxes. This was the result of a government campaign to encourage consumers to spend by lowering taxes levied on specific items like cars.
The Park administration has been trying to keep a lid on the national debt to a GDP ratio of around 40 percent.
The supplementary budget proposal, however, is a turnaround from the government’s early view of the downward risks facing the Korean economy.
Until this month, the government insisted that 3 percent growth or higher was achievable and that there was no need for a supplementary budget.
But April-June quarterly growth fell to half a percent, the same as a year earlier when the economy was hit hard by the Middle East respiratory syndrome scare.
“Since the beginning of the year, the domestic economy’s recovery was held back as consumers tightened their spending and external uncertainties including the U.K.’s decision to leave the European Union have grown,” Finance Minister Yoo said. “We have come up with a policy plan for the second half with exceptional determination.
“The government will employ policy measures, including the supplementary budget, aggressively in countering the short-term conditions while preparing against mid-to-long term global changes such as Brexit.”
The markets are already looking to the central bank and wondering if another interest rate cut is imminent.
Earlier this month the Bank of Korea (BOK) slashed 0.25 percentage points off the key policy rate to bring it to its lowest level ever of 1.25 percent. BOK Gov. Lee Ju-yeol, said it was a pre-emptive move to prevent the economy from further retreating in the wake of corporate restructuring.
However, after Britain surprised global markets by voting to leave the EU, there is growing speculation that the central bank could further lower its outlook for economic growth from 2.8 percent, which could lead to an additional interest rate cut.
“The government and central bank will likely strengthen their policy cooperation to prevent the contraction of investment and weakening of consumer confidence,” said Lee Seul-bi, a Samsung Securities analyst. “In the third quarter, the central bank will likely lower the key interest rate.”
A survey by the BOK on Tuesday showed that consumer confidence in June remained below 100. As it was in May, consumer confidence this month was at 99. A reading below 100 indicates that a majority of respondents are pessimistic about the economy.
BY LEE HO-JEONG [firstname.lastname@example.org]
with the Korea JoongAng Daily
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