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(News Focus) Seoul takes expansionary fiscal policy to spearhead 'income-led growth'

2017/08/29 09:00

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By Kim Boram

SEJONG, Aug. 29 (Yonhap) -- 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-percent on-year rise with spending hitting 429 trillion won (US$382.6 billion), marking the fastest clip since 2009 when the outlay jumped 10.4 percent in the aftermath of the 2008 global financial crisis.

The increase is based on an estimate 7.9-percent gain in total revenue which would hit 447.1 trillion won, including 268.2 trillion won in taxes collected.

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 the first six months of the year, tax collection increased 12.3 percent on-year to 137.9 trillion won, accounting for nearly 55 percent of the target set for 2017.

"This is the time to strengthen the role of fiscal authorities. The government will spend money to spur a paradigm shift in the economy and society," Finance Minister Kim Dong-yeon said in an earlier press conference. "If we now increase spending in sectors that need money and can reduce the mid- and long-term costs, now is the right time to inject money."


South Korea's Finance Minister Kim Dong-yeon (R) speaks at a press briefing on the 2018 budget proposal held in Sejong on Aug. 25, 2017. (Courtesy of the Ministry of Strategy and Finance) South Korea's Finance Minister Kim Dong-yeon (R) speaks at a press briefing on the 2018 budget proposal held in Sejong on Aug. 25, 2017. (Courtesy of the Ministry of Strategy and Finance)

He said the expansionary fiscal policy, under which the on-year gain in budget far surpasses the nominal economic growth forecast of 4.5 percent for 2018, is aimed at realizing the president's "income or "consumption-led growth," policy that calls for increasing household income and spending with the help of various policy tools. This the chief executive claimed can contribute to sustainable economic growth.

Earlier, the Moon Jae-in government announced a step-changing road map with four key principles of income-led growth, job-creating economy, fair economy and innovative growth, while it came up with a tax code revision involving a hike of both income and corporate taxes from well-off individuals and businesses.

The government argued such efforts can allow Asia's fourth-largest economy to achieve balanced and sustainable growth through stimulating the economy in the short-term and helping both households and businesses enjoy the fruit of economic development moving forward.

With this in mind, state spending will be largely used to create jobs and redistribute in a way that reduces the gap between the haves and the have-nots and get ordinary people to have more money to spend.

Reflecting this approach, the bulk of 2018 budget will go to the health, welfare and labor sectors with the total allocated hitting a record 146.2 trillion won, including 19.2 trillion won solely for job creation.

Along with an additional 30,000 new public jobs like police officers and quarantine officials, the government will expand financial support such as children subsidies and basic pension in accordance with life cycle stages to help households spend more.

Also, the education expenditure has been marked up 11.7 percent to 64.1 trillion won to ease rising education costs, while some 18.9 trillion won will be earmarked for public safety and security.

On the other hand, next year's planned outlays for social overhead capital was cut by 20 percent to 17.7 trillion won as part of the government's broader effort to streamline lavish public works projects.

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 next year but secured fiscal soundness at the same time by carrying out fiscal restructuring. It has saved 11.5 trillion won by removing unnecessary expenditures and scaling down ineffective social infrastructure projects.

"We've gone through tough fiscal restructuring in order to fuel the bigger fiscal role," said the minister. "Therefore, the fiscal deficit and the national debt-GDP actually improves slightly next year."

   The fiscal deficit is estimated to reach 1.6 percent of the country's GDP next year, an 0.1 percentage point improvement from 1.7 percent set for 2017, while the ratio of national debt to GDP will edge down 0.1 percentage point to 39.6 percent in 2018.

In the long term, the government will manage the fiscal deficit to GDP to 2.1 percent by 2021 and the national debt at 40.4 percent of the GDP despite the fiscal expansion.