Gov’t proposes $510 billion budget for next year, emphasizing fiscal tightening

Economy

Gov’t proposes $510 billion budget for next year, emphasizing fiscal tightening

Published: 27 Aug. 2024, 11:22 Updated: 27 Aug. 2024, 18:24

SHIN HA-NEE
shin.hanee@joongang.co.kr

President Yoon Suk Yeol speaks during a Cabinet meeting held at the presidential office in Yongsan District, central Seoul, on Tuesday. [YONHAP]

The Korean government has proposed a budget of 677.4 trillion won ($509.6 billion) for next year, marking an on-year increase of 20.8 trillion won, or 3.2 percent.

The budget growth, outlined by the Ministry of Economy and Finance on Tuesday, is mildly larger than this year’s 2.8 percent increase, which was the slimmest since 2005 when the government changed the method of data compilation.

However, it is still in line with the Yoon Suk Yeol administration’s ongoing efforts to tighten fiscal policy, with the modest expansion falling short of the nominal economic growth forecast of 4.5 percent next year expected by the government.

Tightening the purse strings

“By re-evaluating the validity of budget execution across all fiscal operations, we have reduced state spending by 24 trillion won [from existing expenditures],” President Yoon said during a Cabinet meeting at the presidential office in Yongsan District, central Seoul, on Tuesday.

“The funds saved through such efforts will be used to fulfill essential state functions,” he said.

The Yoon administration has been cutting state expenditures by more than 20 trillion won every year, but details of the restructuring, such as which projects have undergone a budget cut, have not been disclosed.

Revenue is projected to come in at 651.8 trillion won, up 6.5 percent from this year, with tax revenue representing 382.4 trillion won, growth of 4.1 percent.

The Finance Ministry outlined four major themes for next year’s budget proposal: bolstering welfare for socially vulnerable populations, enhancing economic vitality, implementing fundamental improvements for a better future and strengthening safety and security.

Selective welfare policy

Within the tight budget plan, social welfare, which also includes employment and public health, got an increase of 4.8 percent, or 11.4 trillion won, to 249 trillion won, the biggest allocation among 12 expenditure classifications.

The maximum cap on subsidies provided under the monthly allowance program for financially vulnerable households will be upped by 6.42 percent to 1.95 million won per month for a four-member family, compared to this year’s 1.83 million won.

The government plans to supply 252,000 public housing units, the most ever, with 14.9 trillion won allocated. The number of jobs for seniors will be expanded to 1.1 million, up from the current 1.03 million, covering more than 10 percent of the elderly population.

The maximum payout for parental leave will be increased significantly to 25 million won per month, compared to the current 15 million won.

The budget for the medical reform initiative, which includes helping universities with the expansion of the medical school admissions quota and providing support for the training of resident doctors, is set at 2 trillion won.

Restored R&D budget

Research and development (R&D) spending, which was heavily cut for this year’s budget, will be upped by 11.8 percent or 3.2 trillion won, to 29.7 trillion won. The defense budget will be expanded by 3.6 percent to 61.6 trillion won.

In terms of R&D, the government designated AI, bio and quantum technology as three main areas of focus for strategic investments, dubbed “game changer” sectors, with 3.5 trillion won allotted. This is a 700 billion won increase from this year.

Moreover, semiconductor-related capital expenditures will be eligible for low-interest loans worth 4.3 trillion won in total. The current 90 billion won fund dedicated to low-interest loans to help smaller companies with R&D expenditures will be expanded to 120 billion won.

Out of 12 classifications, the only sector that saw a decrease compared to this year was infrastructure, down by 3.6 percent or 900 billion won, to 25.5 trillion won, mainly due to some major projects nearing completion.

Fiscal soundness takes priority

The government’s spending plan aims to bring the managed fiscal balance, a key measure of the country’s fiscal soundness, above the negative 3 percent threshold relative to GDP.

Korea’s managed fiscal balance — calculated as the difference between total state revenue and expenditure but excluding the balance of social security funds — stood at minus 3.6 percent of GDP last year.

The Finance Ministry expects the managed fiscal balance to remain at minus 3.6 percent this year and improve to minus 2.9 percent next year.

“We have kept the level of the debt-to-GDP at 48.3 percent, only a 0.8 percentage point increase from the previous year,” said Finance Minister Choi Sang-mok during a press briefing held at the government complex in Sejong on Aug. 22.

“As Korea, along with many other nations, saw a significant deterioration in fiscal sustainability due to the pandemic, the government is currently focusing on normalizing our fiscal situation and bolstering its sustainability,” said Choi.

The government proposal will be submitted to the National Assembly for approval early next month.

Updated, Aug. 27: Added details about specific budget allocation, statement from Finance Minister Choi Sang-mok.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]