Gov't sets W10 tril. extra budget to overcome Brexit fallout
Growth outlook cut to 2.8 %; effect of stimulus questioned
By Nam Hyun-woo
The government announced a 20-trillion-won stimulus package, Tuesday, including a 10-trillion-won supplementary budget, as it cut the economic growth forecast to 2.8 percent from 3.1 percent.
It came up with the fiscal stimulus to fight the economic impacts from the slowing of domestic and overseas demand, and the fallout of Britain’s decision to leave the European Union.
However, analysts are skeptical about the ability of the package to boost the economy as it is more focused on cushioning adverse impacts rather than revitalizing the entire economy, given the size of the extra budget.
Finance Minister Yoo Il-ho said new spending was essential for the country to tackle deteriorating economic conditions both at home and abroad.
“To maximize the effect of the extra budget at the earliest possible time, the government will submit the package to the National Assembly soon,” Yoo said. “Given the urgent situation of the country’s economy, I urge lawmakers to pass the package promptly.”
Yoo said the government had to set up the extra budget because it wants to prevent a further slump in the economy by using aggressive fiscal policies.
Unlike the two previous extra budgets in the current administration, the government pledged that it will not issue treasury bonds this time.
To finance the more than 10 trillion won budget, the government will instead use reserved revenue from last year’s and this year’s tax surpluses.
The government will fix the detailed amount through negotiations with the political parties.
In addition to the supplementary budget, the government will raise another 10 trillion won through investment from state-run corporations and mobilization of policy loans and other state funds.
“To minimize the impact of Brexit and the ongoing corporate restructuring, the distribution of the extra budget will be focused on job creation or removing the difficulties in the people’s livelihood,” the government said.
Minister of Strategy and Finance Yoo Il-ho, center, announces a stimulus package for the second half of this year, along with relevant ministers during a news conference at the Government Complex in central Seoul, Tuesday. / Yonhap
This is the first time in 13 years for the government not to rely on issuing treasury bonds for the budget. In 2013 and 2015 when the Park administration set up 17.3 trillion won and 11.6 trillion won, respectively, supplementary budgets, it had to issue bonds because tax revenue was smaller than expected.
But this time, the government expects at least a 9 trillion won tax surplus this year. Given the remainder of last year’s tax revenue is about 1.2 trillion won, the Ministry of Strategy and Finance said the government has the capacity to raise the 10 trillion won.
The government expects that the 20 trillion-won stimulus package will raise the country’s growth rate by 0.25 to 0.3 percentage points this year.
However, analysts questioned this.
“Given the fact that the government needed 15 to 20 trillion won to meet its growth target, the 10 trillion won extra budget is not as large as the market expected,” said Hana Financial Investment analyst Kim Yong-goo. “It’s a plan for cushioning the impact from Brexit and potential mass unemployment from the ongoing restructuring, rather than an aggressive pump-priming policy.”
Kim said the government prioritized setting the budget within a range that does not hurt fiscal stability.
“This extra budget is focused on cushioning a shock, but not aggressive enough to boost the economy,” he said.
The government pledged a temporary tax reduction to prompt people to replace old diesel vehicles. Also, it designated 11 industrial sectors including robotics as new growth engines and promised to support them through funding and tax exemptions.
For the shipbuilding and shipping industries undergoing harsh restructuring, Yoo said the government will announce measures to prevent them from losing jobs.
The ministry also forecast that around 300,000 people will be newly hired in 2016, down from 340,000 new jobs created a year earlier.