© YONHAP News

The National Assembly has passed next year’s budget that exceeds 500 trillion won, or around 420 billion US dollars, for the first time ever. While South Korea’s economic growth may possibly fall below the 2 percent mark this year and is also projected to stay in the lower 2 percent range in 2020, attention is turning to whether the largest-ever state budget will function to speed up a much-awaited economic recovery. Here is Choi Bae-geun, professor of economics at Konkuk University, to examine next year’s expansionary budget.  

Last week, the National Assembly passed next year’s budget worth 512.3 trillion won, which is roughly 431 billion US dollars, slightly down from the government’s initial proposal of 513.5 trillion won. Still, it is a new record high that represents a 9.1 percent increase from this year’s budget. 

A significant portion of the supersized budget is allocated to measures aimed at improving the industrial structure and strengthening economic fundamentals. The budget also calls for spending on welfare, especially for the elderly and low-income families, with the number of people aged 60 or older increasing by 580-thousand each year. 

It marks the second consecutive year that the budget has increased by more than 9 percent on-year, the first such case since 2009 when the nation suffered from the aftermath of the global financial crisis. 

There is a big jump of 26.4 percent planned for the industry, small-and-mid-sized firms and energy, 18 percent for research and development and 17.6 percent for social overhead capital. Also, the government will spend more in tackling pending economic challenges. 

South Korea decided in October to give up its developing country status in the World Trade Organization or WTO in the agricultural sector. That means the nation can no longer seek benefits it has enjoyed when importing agricultural products and the local farming industry will therefore face a new crisis. To address the problem, the government has decided to increase the agricultural budget by 180 million dollars. 

Next year’s budget also calls for a considerable surge of another 180 million dollars to cope with worsening fine dust pollution, which has become a major health problem here. 

In addition, the government has raised its budget by more than 1.8 billion dollars to sharpen competitiveness in the manufacturing of materials, parts and equipment. No doubt, the increase has much to do with Japan’s export restrictions on key industrial materials to South Korea. 

The government’s overall spending plan for next year is aimed at overcoming the weakening economy. 

The global economy has lost steam and the international trade environment has deteriorated significantly due to growing uncertainties from various unfavorable factors including the ongoing trade war between the U.S. and China. The Korean economy has also been affected by the negative external factors. At a time when households and companies struggle with economic difficulties, the government typically plays an active fiscal role to prop up the private sector because the worsening economy will result in declining tax revenues. 

Last month, the Bank of Korea revised South Korea’s growth forecast to 2 percent from 2.2 percent for this year, and to 2.3 percent from 2.5 percent for 2020. The Asian Development Bank has also lowered its projection for Korea’s economic growth to 2 percent from 2.1 percent for 2019, to 2.3 percent from 2.4 percent for next year. 

Against this backdrop, the Korean government will tide over the crisis through fiscal expansion. It plans to use more than 70 percent of the 2020 budget in the first half of the year to create momentum for an economic rebound. 

But there are concerns that the mega budget may undermine the country’s fiscal soundness. 

More government spending will inevitably lead to a surge in national debt. But the national debt-to-GDP ratio will still remain below 40 percent. Japan’s debt-to-GDP ratio is about 240 percent, while the figure for the U.S. is over 100 percent. Even for Germany, which boasts the highest level of financial soundness in Europe, the ratio is at the mid-60 percent range. 

Under the previous Park Geun-hye government, the Ministry of Economy and Finance said that it would manage the debt-to-GDP ratio within 45 percent. But it will still be under 40 percent next year, despite the steep budget increase. Therefore, I’d say that the government’s fiscal soundness is strong enough. 

The government plans to issue state bonds worth 60 trillion won or about 54 billion dollars next year to finance the budget. The national debt-to-GDP ratio will then rise over 2 percentage points to 39.8 percent, but the government says it can fully manage the situation. The International Monetary Fund and the U.S. Treasury Department also evaluate that it is appropriate for Korea to adopt an expansionary fiscal policy. The key is how to use the large budget to actually invigorate the economy. 

The budget should be used in a way to create many quality jobs. Jobs enable people to earn income, which will encourage them to spend more, and more consumption will prompt companies to increase investment. So, a successful budget execution depends on whether it will generate many more decent jobs. For that purpose, the government should foster new industries that will replace manufacturing. That’s why the government is committed to focusing on bolstering economic fundamentals. I think the key is whether and how to produce results in this area. 

With the global economy worsening rapidly, an expansionary budget is not a matter of choice but a must. The state budget should be used properly and effectively to help the Korean economy pick up steam and improve its fundamentals.