Extra budget unlikely to provide impetus for growth
By Park Hyong-ki
A 6.7 trillion won ($5.8 billion) supplementary budget proposed by the government is not expected to provide the impetus needed for economic growth, according to analysts.
However, they said it will prop up the economy by 0.1 percentage points, less than initial expectations when the International Monetary Fund (IMF) suggested a 9 trillion won extra budget.
This came after the Moon Jae-in administration unveiled its third extra budget, Wednesday, to fight air pollution (2.2 trillion won) and to revive sluggish exports and create more jobs (4.7 trillion won).
“The government's supplementary budget will help partially offset the impact on the economy from weakening exports and a slowdown in global electronic orders,” said Rajiv Biswas, chief economist at IHS Markit Asia in Singapore.
“However, it is estimated to add just 0.1 percentage points to Korea's GDP growth this year, which may not be enough to offset the significant headwinds the economy is facing this year.”
It will still fall short of achieving the 2.6 percent growth projected by the IMF.
Key problems posing downside risks to Korea include falling global demand for Korean goods amid a slowdown in the United States and European Union, as well as the ongoing U.S.-China trade war, Biswas added.
Kim Doo-un, an economist at KB Securities, agreed, saying the effects of the extra fiscal spending on growth will be marginal.
He also said it will increase the country's growth by a “maximum” 0.1 percentage points to 2.5 percent this year.
“But the difference between this budget and former ones is that the 6.7 trillion won extra spending plan reflects our social need to improve the environment and reduce fine dust,” Kim said.
“The public spending on equipment, filters and regional redevelopment after a forest fire will help boost domestic demand.”
Former extra budgets were mostly spent on construction and land development to raise overall GDP over the short term, Kim noted.
The Moon administration drew up supplementary budgets worth 11 trillion won in 2017 and 3.8 trillion won in 2018.
Finance Minister Hong Nam-ki listens to reporters' questions on the government's supplementary budget in Sejong City, Monday. Yonhap
Finance Minister Hong Nam-ki told reporters the supplementary budget on its own would not help the economy grow 2.6 percent this year.
The government will spend 2.2 trillion won to reduce fine dust and rebuild fire-scarred regions in Gangwon Province. The rest will be spent on supporting medium-sized businesses and venture startups.
Hong said his ministry will use the budget to extend loan guarantees and export financing for small businesses, and buy new equipment to replace old machinery and reduce fine dust. This will include disposing of old diesel cars and boilers inside power plants.
“We will also strengthen our system to pre-emptively deal with fine dust,” Hong told reporters in Sejong City.
He insisted the country's fiscal soundness would not be negatively affected. The ministry will issue state bonds worth 3.6 trillion won, and the rest will come from reserves and retained earnings.
The state debt proportion to GDP is expected to stand at 39.4 percent this year, up from 38.2 percent last year, according to the finance ministry.
The analysts agreed the country's fiscal position will remain intact even with the extra fundraising and spending.
“The impact of the supplementary budget on Korea's fiscal position will be relatively modest, due to the limited size of the total supplementary package and Korea's relatively modest overall government debt to GDP ratio,” Biswas said.