South Korea plans record 2016 budget as Park seeks growth

[SEOUL] South Korea will spend a record 386.7 trillion won next year (S$456 billion) as President Park Geun Hye looks to lift the economy out of the doldrums with increased government expenditure.

The proposed 2016 budget is 2 trillion won more than this year's 384.7 trillion won spending plans, which included a supplementary package approved in July.

The government's debt is expected to climb to a record 40.1 per cent of the country's gross domestic product as the deficit reaches 2.3 per cent of the GDP in 2016, the Finance Ministry said in its budget proposal. It said South Korea is expected to have a budget shortfall through 2019. Even so, the size of the planned outlays was smaller than forecast, according to Lee Sang Jae, a Seoul-based economist for Eugene Investment & Securities Co.

"The budget plan puts more emphasis on maintaining fiscal soundness than on supporting growth," Mr Lee said. "The size of the budget proposed also may mean that monetary policy should be more active in supporting growth next year." Even after a series of interest rate cuts by the central bank to a record low and unprecedented fiscal spending this year, Asia's fourth-biggest economy is under pressure with China's slowing growth.

Korea's exports plunged the most since 2009 in August, adding headwinds to an economy that is just emerging from the aftermath of the MERS outbreak that kept tourists away and consumers from getting out and spending.

The won gained 0.3 per cent to 1200.72 per dollar in Seoul on Tuesday. Government bonds fell, with the three-year yield rising two basis points to 1.67 percent, Korea Exchange prices show.

"Fiscal spending is playing a growing role in reviving economic momentum and so we proposed it to be expansionary," Vice Finance Minister Bang Moon Kyu said before Tuesday's announcement. The government has cut its growth forecast for next year to 3.3 per cent from 3.5 per cent, Mr Bang said.

Welfare programmes are set to receive the biggest allocation, with 122.9 trillion won in spending, including 15.8 trillion won to create jobs. General public services gets the second largest with 60.9 trillion won, followed by education with 53.2 trillion won.

The government plans to boost spending on defense by 4 per cent to 39 trillion won as it seeks to modernize military equipment in the face of possible North Korean threats.

The fiscal deficit will be 37 trillion won next year, equal to 2.3 per cent of GDP, the Finance Ministry said in a statement.

The government outlined plans in 2014 to put the budget into a surplus by 2017. The government now forecasts deficits to continue through 2019, when it sees a shortfall of 0.9 per cent of GDP, according to a mid- to long-term fiscal policy plan released alongside the budget proposal.

South Korea calculates its budget balance differently from the method used by the Organization for Economic Cooperation and Development, and excludes the balance of social-security related funds.

The ministry plans to sell 110.4 trillion won of bonds in 2016, compared with 111.9 trillion won this year, according to treasury bond market director Kim Hye Cheon.

The ministry will present the budget draft to lawmakers on Sept 11 for parliamentary approval.

BLOOMBERG