South Korea: Seoul takes expansionary fiscal policy to spearhead ‘income-led growth’ – 29 Aug 2017

  • The 2018 budget will increase at the fastest pace in nine years as the South Korean government has decided to take an expansionary fiscal stance to back up President Moon Jae-in’s slogan of “income-led growth.”
  • The government’s 2018 budget calls for a 7.1% y/y rise with spending hitting KRW429tr (USD382.6bn), marking the fastest clip since 2009 when the outlay jumped 10.4% in the aftermath of the 2008 global financial crisis.
  • Asia’s fourth-largest economy has been basking in a sharp hike in tax revenues thanks to a rise in income and corporate taxes amid a steady pace of growth. For 1H17, tax collection increased 12.3% y/y to KRW137.9tr, accounting for nearly 55% of the target set for 2017.
  • The bulk of 2018 budget will go to the health, welfare and labor sectors with the total allocated hitting a record KRW146.2tr, including KRW19.2tr solely for job creation.
  • The expansionary fiscal policy has raised concerns that the country’s fiscal deficit will widen in the coming years if the planned spending does not bring about higher economic growth.
  • But the finance ministry said it put more focus on fiscal expansion in 2018 but secured fiscal soundness at the same time by carrying out fiscal restructuring. It has saved KRW11.5tr won by removing unnecessary expenditures and scaling down ineffective social infrastructure projects.
  • The fiscal deficit is estimated to reach 1.6% of the country’s GDP nexin 2018, an 0.1% improvement from 1.7% set for 2017, while the ratio of national debt to GDP will edge down 0.1% to 39.6% in 2018.
  • In the long term, the government will manage the fiscal deficit to GDP to 2.1% by 2021 and the national debt at 40.4% of the GDP despite the fiscal expansion.

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