Korea: Moon administration proposes the largest government budget increase in a decade
In unveiling its 2019 budget proposal on 28 August, the administration of President Moon Jae-in presented the largest budget increase since the aftermath of the global financial crisis in 2009. The scale of the proposal was most likely part of an attempt to support economic growth, improve an increasingly-fragile labor market and possibly boost the popularity of President Moon Jae-in, given that it has tumbled in recent weeks.
Scheduled government expenditures of KRW 470.5 trillion (USD 420 billion) would represent a 9.7% increase compared to the budget for 2018. A 7.6% expected increase in revenues, mostly due to higher corporate tax revenue, should limit its negative impact on the fiscal balance and national debt, according to the Ministry of Finance. Moreover, given that public debt fell to 39.8% of GDP in 2017 thanks to an increased fiscal surplus, Korea is not in immediate danger of tripping into concerning fiscal territory. Nevertheless, there will likely be a small deterioration in the public finances because the absolute rise in revenues is unlikely to compensate for the higher spending.
It should come as no surprise that spending specifically earmarked for job creation will rise 22.0% in 2019 compared to 2018, according to the budget proposal. The labor market has recently shown signs of weakness and the unemployment rate rose to a near nine-year high in August. This is despite President Moon’s continual emphasis on improving labor conditions since he was elected president in 2016. The increased expenditure will aim to tackle unemployment, which seems to have worsened following the introduction of a 16% minimum wage hike in January. Meanwhile, the budget also pencils in notable spending hikes for healthcare, welfare, education and grants to local governments.
The expansionary nature of the proposed budget will almost certainly stimulate economic growth in 2019. This would come at an appropriate time given the prevailing economic headwinds, which include: elevated household debt; rising global trade tensions; higher oil prices; signs of an economic slowdown in China; and uncertainty surrounding the future denuclearization of North Korea. The proposed budget was sent to the National Assembly on 31 August for discussion among legislators. According to analysts at Nomura: “Our baseline view is that the National Assembly, in which the ruling party has 129 of 300 seats, will pass the  budget with only minor adjustments, no later than early December”. Assuming this is the case, the economy should receive a shot in the arm from government consumption in 2019.