Korea: large budget hike for 2015
Published 23 September 2014
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This publication was archived on 4 July 2016
This article is no longer current. Please refer to Overseas Business Risk – South Korea
Summary
On 18 September, the Deputy Prime Minister and Finance Minister Choi announced a “super expansionary” budget for 2015, to help boost Korea’s slowing economic growth. The spending is designed to create a virtuous cycle to boost the economy, by raising household income and spending to further support tax revenue. Korea’s GDP growth slowed to 0.5% in Q2 2014, prompting the Bank of Korea to revise down its 2014 GDP growth forecast to 3.7%.
Detail
The Ministry of Strategy and Finance (MOSF) will raise the budget by 5.7% to KRW 376tn (£218bn), the greatest hike since 2008, and continue to increase fiscal spending by an average 4.7% each year until 2017, the final year of President Park’s term.
Key points:
- Health, welfare and employment expenditure will rise to 30.7% of total spending, the most that has ever been spent on these sectors;
- Spending on job creation will rise 7.6% to raise the number of full-time, quality jobs [comment: unemployment is low at 3.5% but such jobs are in short supply];
- The creative economy will receive an injection of KRW 8.3tn (£4.8bn), up 17.1% from 2014, to build countrywide innovation centres and develop a Korean Silicon Valley;
- Spending on safety measure will rise 17.8% to KRW 14.6tn (£8.5bn), including spending on rescue helicopters, fire-engines, and communications systems, in reaction to the Sewol ferry disaster; and
- Social Overhead Capital (infrastructure expenditure) will increase by 3% to KRW 24.4tn (£13.8bn).
Many commentators are concerned that this spending will damage Korea’s fiscal health. But Korea’s fiscal deficit is only set to rise to 2% of GDP in 2015, from an expected 1.7% in 2014, which is relatively low by OECD standards. MOSF predicts government debt will reach 35.7% of GDP in 2015, again, well below the current OECD average of 107%. Under the government’s fiscal management plan it expects the fiscal deficit to be reduced to 1.3% by 2017. This will largely be achieved through increased sales of government bonds in 2015. Earlier in the week the government announced a doubling of taxes on the purchase of cars, residential property, and tobacco over the next two to three years, and it has announced its intention to overhaul public sector pensions and claw back taxes on corporate sector profits that have moved overseas.
The budget itself will likely have some short term impact, but analysts believethat, in order to achieve any virtuous circle, it will have to be complemented by implementation of the wider suite of structural changes the President announced earlier this year under Korea’s 3 Year Economic Growth Plan.
The 2015 budget plan must now gain National Assembly approval, which is likely to happen in December. It is not anticipated that the Assembly will make major changes to the proposals.
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