The South Korean government has announced its budget plan for next year. On August 29, the Moon Jae-in government that advocates “income-led growth” proposed a record 429 trillion won budget for 2018, which is up 7.1 percent from this year. The amount is roughly 381 billion US dollars. Here’s Professor Choi Bae-geun from the Economics Department at Konkuk University to explain in depth the annual budget proposal, the first of its kind under the current Moon government.

We have to note three parts in the budget plan. First, the 7.1 percent jump in the state budget marks the largest year-on-year rise since 2009. Secondly, expenditures for health, welfare and labor have gained 12.9 percent, which is the biggest increase in next year’s budget. The education budget, which involves investment in human resources, has also increased 11.7 percent. Overall, the budget bill shows that the Moon government supports “a people-focused economy” and “income-led growth.” Thirdly, in contrast, the government drastically cut the budget for social overhead capital such as roads and railways by 20 percent.

The government budget was tallied at 70 trillion won (63 billion US dollars) in 1998, when Korea was reeling from the aftermath of the Asian financial crisis. Ten years later, in 2008, the budget jumped to 256 trillion won (232 billion dollars) and it surpassed 400 trillion won for the first time this year. And next year’s budget will be even bigger, with a record amount of 146 trillion won (132 billion dollars) allocated for welfare. Budgets for education and national defense have been set at 64 trillion won (58 billion dollars) and 43 trillion won (39 billion dollars), respectively. On the other hand, spending on physical capital will be reduced, as seen in the 20-percent cut in the budget for social overhead capital.

I’d say that the budget bill well reflects the Moon government’s state management philosophy. Expenditures for health, welfare, labor and education account for 49 percent, so nearly half, of the total budget. This indicates that the government is focused on improving welfare and increasing household income. In the past, the government would give support to large companies as a way of boosting the sluggish economy, in the hopes that growth of the companies would create more jobs. But the plan often failed to live up to the government’s prior expectations. This time, the government will take the lead in bolstering growth potential and creating jobs by expanding the budget. In other words, the role of the government’s fiscal policy will be strengthened.

N: Previously, the government budget was mostly focused on industries and social overhead capital, sparking criticism that welfare was put on the back burner and investment in human resources was rather inadequate. As part of efforts to remedy the situation, the Moon government has released a budget plan that shows a paradigm shift toward a people-focused economy. It calls for an active and leading role of the government’s fiscal policy in order to establish a virtuous circle of job creation, distribution and growth. The current government will likely maintain this policy line throughout its term. On August 29, the government also announced its fiscal plan as well.

The government has offered two promises. First, it said it would save 11.5 trillion won by cutting expenditures. It is a massive amount, which is 2.1 trillion won more than initially expected. Also, the government said that it would be able to secure finances by levying more taxes on high-income earners. In doing so, it is expecting to collect an additional 25.9 trillion won in taxes and therefore achieve a more sound fiscal balance next year. The government is projecting an annual budget increase of 5.8 percent on average through the year 2021. Currently, the ratio of Korea’s national debt to its gross domestic product, or GDP, stands at 40 percent. The government believes it can manage the level within the early 40-percent range, with the figure rising to 40.4 percent in 2021. The projection is based on the government’s estimation that tax revenues will increase through tax hikes for superrich individuals and that the nation will maintain its real economic growth rate in the 3-percent range.

According to the Moon administration, which is in favor of “a big government,” the budget will exceed 500 trillion won (450 billion dollars) and national debt will also increase by 160 trillion won (145 billion dollars) within its term. But the government says there should be no problem. It explains that it can manage its fiscal health if it reduces expenditures properly, since there will be more tax revenues. The government expects the estimated fiscal deficit of 28.6 trillion won (26 billion dollars) next year will increase to 44.3 trillion won (40 billion dollars) in 2021, but it says it will still maintain the deficit to the GDP ratio in the 2-percent range in the coming four years. But there are concerns over the government’s plan.

The government says that it will slash its expenditures to save 11.5 trillion won in the first year. But it isn’t easy to continue to save that amount of money in the following years. The government also says it is aiming for 4.5 percent in nominal economic growth, which is equal to the real growth rate of 3 percent plus the 1.5-percent inflation, while the total tax revenues are expected to rise 6.8 percent. That means the rate of the tax revenue increase will be higher than that of economic growth. One of the reasons for higher tax revenues this year is that the nation has collected more corporate taxes. As a matter of fact, however, companies have paid more corporate taxes not because they achieved growth but because they made profits by reducing costs through restructuring amid an unfavorable business environment. It won’t be easy to continue to collect more corporate taxes in this way. Therefore, it seems the government is being too optimistic about an increase in tax revenues.

The super budget, based on the outlook that the economy will keep growing 3 percent, may lead to excessive national debt if the government fails to secure fiscal income as planned. Moreover, the situation both inside and outside the nation is not promising. Given the worsening environment for exports, low consumer spending and a contraction in the real estate market, it seems challenging to post over 4 percent of nominal economic growth. It is necessary for the government to come up with a long-term blueprint in order to fulfill its goal of realizing a big government.

The key economic goal of the Moon government is to create jobs. Only when it achieves this goal successfully, can it improve an economic environment led by its fiscal policy and lift the growth rate. Last year, construction investment contributed 1.6 percentage points to the 2.8 percent growth. But the reduced budget for social overhead capital and the stabilized real estate market may slow construction investment. If the nation fails to provide another growth engine to fill the vacuum, the growth rate may not reach the target level. After all, the Moon government will be able to fulfill its economic goal when it manages to create jobs by improving the economic system through industrial restructuring.

The government seeks to boost economic growth through its fiscal plan. A significant amount of finance is required for a big government that pours a lot of state money through an active fiscal policy. It seems necessary to devise a comprehensive solution to improve the economic system.