[Editorial] Extra budget

The government is leaning toward creating a supplementary budget in the second half of the year to boost the sluggish economy.

Finance Minister Yoo Il-ho said Friday that the government would come up with aggressive fiscal measures to cope with growing downside pressures at home and abroad.

A day earlier, he had said the government would examine the option of drawing up an extra budget in its search for the right mix of policies to revitalize the economy.

The minister’s remarks represent a shift in the government’s stance on compiling a supplementary budget. Until recently, Yoo had consistently denied the possibility of creating an extra budget to stimulate the economy.

The change is well-conceived, given the tepid performance of the Korean economy. In the first quarter of the year, the economy grew a mere 0.5 percent on-quarter, slowing down from the 1.2 percent expansion in the third quarter of 2015 and 0.7 percent in the fourth quarter.

Exports continue to falter, weighing heavily on domestic demand and dragging down corporate facility investment.

Furthermore, unemployment is on the rise as restructuring of the ailing shipbuilding industry gathers pace. The number of manufacturing workers in South Gyeongsang Province, where dockyards are concentrated, fell 26,000 in May compared to a year earlier, showing that corporate restructuring has begun to impact the job market.

With the outlook for the Korean economy worsening, the Bank of Korea recently cut its policy interest rate by 25 basis points.

Despite the slow recovery, tax revenues surged in the first four months of the year, giving the government more flexibility in implementing new stimulus packages.

During the January-April period, the government collected 96.9 trillion won ($83.2 billion) in taxes, up 23 percent, or 18.1 trillion won, from the same period a year ago. The revenue represents 43.5 percent of the government’s annual target of 222.9 trillion won.

The boost in tax revenue came from an increase in corporate profits and a rise in consumption, which resulted from the government’s pump-priming measures implemented last year to offset weak external demand.

If the government decides to create an extra budget, its size will have to be fairly large to reverse the economic slowdown. The government’s growth target for this year is 3.1 percent, but many research institutes have lowered Korea’s growth estimates to the mid-2 percent range.

Last year, the Hyundai Research Institute estimated it would take 22 trillion won to boost Korea’s economic growth rate from 2.6 percent to 3 percent.

The government needs to create an extra budget early as downside risks from corporate restructuring are growing. It should focus on job creation to reduce unemployment and boost domestic demand.