Moon plans South Korea's biggest spending boost in a decade

[SEOUL] South Korea plans to spend a record 429 trillion won (S$380 billion) next year as the government seeks to boost welfare benefits and raise the number and quality of jobs.  The 2018 budget proposal is 7.1 per cent more than the initial plan for this year, the biggest gain since a jump in spending in 2009, when the economy was reeling from the global financial crisis. Welfare outlays will rise by the most on record, while spending for infrastructure, culture and sports will be reduced, according to a statement from the finance ministry.

President Moon Jae-in wants to reduce inequality and shift the economy's export-led growth structure into one that is led by higher income and consumption. With the supplementary budget for this year and expanded spending next year, the government expects the economy to grow at around 3 per cent.

"Fiscal policy needs to play an active, leading role to create a virtuous cycle between growth and distribution," Finance Minister Kim Dong-yeon said at a press briefing last week ahead of the release. The spending plan reflects what the new administration wants and also maintains the nation's mid-to-long term fiscal soundness, Kim said.  Government revenue will increase by 7.9 per cent next year, owing to a tax-rate revision and improved corporate performance, the finance ministry estimates. The government's debt is expected to be at 39.6 per cent of gross domestic product, while the deficit ratio will improve slightly to 1.6 per cent of GDP, according to the ministry.

Moon's administration plans to increase spending by an average 5.8 per cent per year in 2017-2021, and expects revenue to rise by 5.5 per cent. The fiscal deficit will be around 2 per cent and government debt around 40 per cent of GDP during the period, according to the statement.

"South Korea is jumping on the global trend of using active fiscal policy to boost growth," said Stephen Lee, an economist for Meritz Securities in Seoul. "The mid-term spending plan released today doesn't raise immediate concerns over deterioration of fiscal balances, but it will be hard to maintain the soundness as the population ages." South Korea calculates its budget balance differently to the Organization for Economic Cooperation and Development, and excludes the balance of social-security related funds.

"If somebody asked what the government's priority is - active fiscal policy or fiscal soundness - I would say for now it is active policy," Finance Minister Kim said. "If the government can spend now to change the economy's paradigm and reduce any social costs that may rise in the future, then it's more effective to spend." The government will submit the proposal to parliament on Sept 1. Moon's Democratic Party of Korea holds 120 of the 299 seats.

BLOOMBERG