By Koh Byung-joon
SEJONG, March 28 (Yonhap) -- South Korea's sharp downgrade of its growth outlook for this year and the pursuit of an additional budget mirror the government's somber reality check on how serious the economic conditions for the country have become over the past months, experts said Thursday.
The finance ministry lowered its growth outlook for this year from 3 percent to 2.3 percent. It also vowed to pursue an additional budget aimed at stimulating job creation and boosting the overall economic growth.
The downgrade comes just three months after the government bucked pessimistic market views and kept the projection in the 3 percent range in December. At the time, the ministry said that the growth rate will pick up speed starting from the second half.
"In a nutshell, our trust has weakened about the projection that the economic conditions will pick up as we go into the second half," Choi Sang-mok, the head of the finance ministry's economic policy bureau, told reporters in a briefing.
The downgrade is seen as reflecting the current dire economic conditions confronting South Korea, Asia's fourth-largest economy.
South Korea's gross domestic product grew less than 1 percent on-quarter for the seventh straight quarter, which is the longest streak of such low growth rates. The economy grew 2 percent in 2012, the slowest gain in three years.
Exports, investment and consumption all remain weak.
Exports dropped 8.6 percent on-year in February, a turnaround from the previous month's double-digit growth. In January, the country's industrial output also contracted for the first time in five months.
Businesses remain reluctant to hire and invest amid prolonged uncertainty over market and policy directions of the government.
Facility investment plunged 13.6 percent on-year in January, marking the ninth straight month of contractions. Retail sales also dropped 2 percent last month from a month earlier.
The ministry makes no secret about its pessimistic views of the current situations, saying that there are few signs that investment and consumption will bounce back any time soon. It, instead, promised to make all-out efforts to turn the economy around.
For starters, the ministry said that the government will front-load more than 60 percent of its existing fiscal spending plans during the first half. It will also unveil separate measures to stimulate investment and domestic consumption by the end of May.
As for the prolonged slumping real estate market, the ministry said that it will announce a comprehensive set of measures to thaw the frozen transactions. This is in response to worries that the slumping real estate market is weighing on investment and consumption, and eventually hurting the overall economic growth.
What is drawing more attention is that the government is seeking to draw up a supplementary budget, which would mark the first time in four years that it's come up with one. In 2009, it came up with 28.4 trillion won in extra spending in the middle of the global financial crisis.
"To make up for a decline in tax revenues, help boost the overall economy and support the livelihood of the people, we will seek an additional budget," the ministry said.
The government did not unveil the scale of the supplementary budget, saying that the final decision will be made in April.
However, given that the country's tax revenue shortfall will reach 6 trillion won for this year, the amount may well go beyond 6 trillion won. Some expect that the government will come up with a budget exceeding 10 trillion won.
According to a report by Hyundai Research Institute (HRI), a private think tank, South Korea would need 11 trillion won worth of more spending to raise its growth rate by 0.5 percentage point.
Concerns are being raised that additional spending could hurt the country's fiscal health, which the government has maintained even in the face of the prolonged global financial crisis.
Some experts still said that the current economic conditions warrant such actions, adding that too much emphasis on fiscal health under the current circumstances could just backfire.
"We cannot ignore the importance of maintaining fiscal health but placing too much emphasis on it could cause a paradox where less spending leads to less economic growth and less tax revenues, which eventually hurt the country's overall fiscal health," said Lim Hee-jung, an economist at HRI.
"The fact that the government downgraded its growth rate so sharply means that it admits that the economy is losing its momentum. Once decided to inject additional money, it should consider a large-scale budget that is enough to breathe vitality into the economy again."
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