The government's decision to expand its budget for 2017 comes as it seeks to prop up South Korea's economy faced with sagging exports and rising financial uncertainties stemming from a possible U.S. rate hike, officials and analysts said Tuesday.
The government's 2017 budget proposal calls for a 3.7-percent on-year rise with spending hitting 400.7 trillion won (US$358 billion), surpassing the 400 trillion won plateau for the first time in history.
The increase is based on an estimated 6 percent gain in total revenue which should hit 414.5 trillion won, including 241.8 trillion won in taxes collected.
"The government is trying to keep fiscal expansion possible in the short term to create a virtuous circle. Increased government spending stimulates the economy and then helps the government have more revenue," Vice Finance Minister Song Eon-seog said. "We seek a stronger fiscal policy role in dealing with a downbeat economic cycle."
The finance ministry earlier predicted that the South Korean economy will grow 3 percent in 2017, slightly better than its projection of 2.8 percent growth for 2016, hindered by sagging exports and rising uncertainties in the financial market.
The country's outbound shipments, a key growth engine, plunged 10.2 percent in July from a year earlier, extending its losing streak to a record 19th consecutive month since January 2015, due largely to contracted world demand and low oil prices.
The figure is also expected to post negative growth in August, given that it fell 0.3 percent on-year in the first 20 days of the month amid a global slowdown and a strengthened local currency.
A looming rate hike by the U.S. Fed is expected to fuel the gloomy outlook, as escalating uncertainties throughout the world will weigh heavily on world trade and drag down the highly export-dependent South Korean economy even more.
Consumer spending, another driver of the country's growth, has continued favorable growth on the back of the government-led excise tax cut program and increased fiscal spending in the first half.
Retail sales soared 8.9 percent in June from a year earlier, up from a 5.3-percent jump tallied in May on the back of stellar sales of passenger cars. The government-led tax benefit program, which ended on June 30, drove car sales to post a 20-percent on-year surge for the final month of June.
But it has not been enough to fully offset the slump in exports in the latter half of the year and next year, with the excise tax cut effect dissipating and corporate restructuring taking its toll.
The focus of the 2017 budget is placed on creating more jobs and bolstering the country's growth momentum by overhauling the economy's structure.
Seoul earmarked 17.5 trillion won for job creation, up 10.7 percent from this year, with its overall spending in the welfare, health and labor sectors rising 5.3 percent on-year to 130 trillion won.
In addition to creating more jobs, the government aims to push up defense spending by 4 percent to 40.3 trillion won to build up its own "Korea Air and Missile Defense (KAMD)" system to deal with evolving North Korean missile and nuclear threats.
Some 39.9 billion won will be used to equip all military barracks with air conditioning systems as part of the government plan to improve the quality of life for soldiers.
Budgets for education and public safety also rose 6.1 percent and 3.1 percent, respectively, with a 6.9-percent gain for culture, sports and tourism areas in a run-up to the 2018 PyeongChang Winter Olympics.
Such an expansionary fiscal policy has raised concerns that the country's fiscal deficit will widen next year if the planned spending does not lead to higher economic growth.
But the finance ministry said it will also consider fiscal soundness at the same time by scaling down ineffective social infrastructure projects and overseas energy development programs in a way to seek effectiveness in managing government spending.
The 2017 budget includes a plan to cut spending on social overhead capital by 8.2 percent to 21.8 trillion won, for the sake of promoting effectiveness in the fiscal budget, while it also slashed spending in the industrial and energy development sectors by 2 percent.
"We placed our policy priority more on sound fiscal status than last year," said Song. "For government, fiscal effectiveness and debt management are important, as well as fiscal expansion to fuel growth."
The fiscal deficit is estimated to mark 1.7 percent of the country's GDP next year, down 0.3 percentage point from a year earlier, while the national debt-GDP ratio will fall 0.6 percentage point to 40.4 percent in 2017.
It will reduce the fiscal deficit to GDP ratio to 1 percent by 2020 and keep the national debt at 40.7 percent of the GDP in the coming four years.
Source: Yonhap News Agency