By Choi Sung-jin
With Korea’s economic growth rate hovering below the global average for six consecutive years since 2011, concern is mounting about the slow-growing economy becoming a fixed pattern.
Barring any unexpected development for the better, the economy is estimated to grow less than 3 percent this year, for four straight years except for 2014 when it expanded 3.3 percent, a government report said Monday, quoting forecasts by think tanks and investment banks.
More problematic, the economy seems unable to get out of the prolonged slump although the government has spent more than 100 trillion won ($85.7 billion) on stimulus and buoyed up the property market at the risk of swelling household debt by more than 250 trillion won over the past three years, critics say.
If everything had progressed as government officials predicted, the economy should be growing robustly by now.
However, the growth prospects for this year are darker than ever, as officials are at a loss about what to do now after having used up all means available. They can neither expand government spending nor lower interest rates easily.
Officials at the Ministry of Strategy and Finance, from Minister Yoo Il-ho down, are extremely negative about formulating another extra budget this year. This is because the government’s fiscal health has weakened considerably since two extra budgets and one financial reinforcement, an indirect way of increasing government spending, such as through policy loans and tax benefits, without forming an extra budget that requires parliament approval, since 2012.
The government’s managed fiscal balance -- total revenue (excluding four social security funds) minus expenditure -- was 46.5 trillion won in the red, the biggest deficit ever and even bigger than the 43.3 trillion won recorded in 2009 in the wake of the global financial crisis.
The national debt, which stood at 443 trillion won in 2012, is estimated to increase to 644 trillion won this year. Government liability has exceeded 40 percent of the nation’s gross domestic product for the first time.
“The budget deficit accounted for 12 percent of GDP in 1998, but it has risen to 40 percent in less than 20 years,” the finance minister said during a lecture last month. “There are concerns about the deficit-GDP ratio soaring to 80 percent if we are not careful, forcing us to be very cautious about forming an extra budget.”
Government officials expect the central bank will reduce the interest rate again.
Yet household debt snowballed from 964 trillion won to 1,206 trillion won last year, which the Bank of Korea believes happened while helping former finance minister Choi Kyung-hwan revive the real estate market.
“I have a consistent view that the current interest rate is at a sufficiently moderate level,” said Bank of Korea Governor Lee Ju-yeol. “At a time when international financial markets show instability, the effect of interest rate reduction also becomes quite uncertain.”
The government’s stance may change in the latter half of this year, however, and the April 13 parliamentary election will be its inflection point, economic watchers say.
The opposition parties’ biggest weapon in attacking the government is “economic failure theory.” Kim Jong-in, leader of the main opposition Minjoo Party of Korea says, “The economic policy of the two conservative administrations over the past eight years has been a total failure.”
If the criticism wins voters’ sympathy to bring about a humiliating setback for the ruling camp, the administration will have few other choices but to come up with another stimulus package. “We technocrats want to manage economy in stable ways but have to consider the political calendar of next year (i.e., the presidential election),” a ministry official said.