The government’s budget plan for 2012, unveiled Tuesday, attempts to walk a fine line between improving government finances and stimulating economic growth.
The plan puts priority on, among other things, improving fiscal soundness. It proposes to increase spending by 5.5 percent to 326.1 trillion won, while revenue is expected to increase by 9.5 percent to total 344.1 trillion won.
The 4 percentage point gap between spending and revenue growth is larger than that specified by the government’s fiscal rules. The rule, which was introduced last year, states that the spending increase rate should be kept 2-3 percentage points lower than revenue expansion until the government budget reaches balance by 2014.
Earlier this year, President Lee Myung-bak told officials to move up the target year for budget balance by one year from 2014 to 2013. The decision followed the twin sovereign debt crises in the eurozone and the United States, which probably sharpened Lee’s appreciation of the importance of fiscal health.
The planned budget surplus will thus help the government reduce its budget deficit, which bulged to 5 percent of GDP in 2009 due to a global financial crisis, and is projected to fall to 1 percent of GDP in 2012 from 2 percent of GDP this year. As a result, Korea’s government debt to GDP ratio is projected to drop from 35.1 percent this year to 32.8 percent in 2012.
The decision to prioritize improving government finances is judicious, given the growing possibility of advanced economies slipping back into a double-dip recession. A strong fiscal position is the best defense against recession. It can help a country like Korea weather a global downturn.
But the government can bolster state finances as planned only when the national economy grows as projected. Budget officials at the Ministry of Strategy and Finance forecast the economy would grow 4.5 percent next year, which is similar to projections from the International Monetary Fund (4.4 percent) and the Asian Development Bank (4.3 percent).
But it is much higher than those made by domestic economic research institutes, which are mostly below 4 percent. Given the worsening outlook for the global economy, the government’s growth projection appears to be somewhat optimistic.
To attain the growth target, the plan proposes increasing investment in jobs, infrastructure construction and R&D. It also seeks to expand spending on work-related welfare to increase labor supply and improve the quality of labor. We hope this strategy works.
