The government’s budget proposal for next year has been finalized. The National Assembly passed the 2018 government budget proposal of 428.8 trillion won in the early hours of December 6. The amount is roughly 394 billion US dollars, which is similar to the size suggested in the government’s initial plan. With the parliamentary approval of the budget bill, the Moon Jae-in administration will be able to move forward with its economic policies known as “J-nomics” based on “income-led growth.” Here’s Professor Choi Bae-geun from the Economics Department at Konkuk University to examine the 2018 budget plan.
The proposed budget for next year marks an increase of 7.1 percent from this year, while total revenue next year is also expected to grow 7.9 percent on-year. So, the government’s debt-to-GDP ratio is forecast to decrease about 1 percentage point to 39.5 percent next year from this year’s 40.4 percent. That means a more sound fiscal position. Under the slogan of “a people-focused economy” and “income-led growth,” the Moon government hopes to increase the number of public servants and provide support for those who are financially vulnerable, including low-income households. In light of this, the government will execute its plan, starting next year, to increase the minimum wage to 10-thousand won by the year 2020. But the minimum wage hike may take a toll on small businesses. To minimize the fallout from the measure, about 3 trillion won has been secured for small companies.
The first budget plan drafted by the Moon government is focused on supporting growth with the people at the center. It reflects the so-called “J-nomics”, which seeks to lead economic growth through active fiscal measures. The government will spend 28.3 trillion won more than this year’s budget. The 7.1-percent jump in the state budget is higher than the estimated economic growth of 4.5 percent for next year and marks the largest year-on-year rise in nine years since the global financial crisis. In other words, the government will spend its budget more actively and even faster than the pace of economic growth next year. The budget increase is conspicuous in education and welfare.
The government’s budget is allocated to 12 areas, with the largest budget increase of 11.8 percent seen in education. Health, welfare and employment spending also grew 11.7 percent. In contrast, the government cut the budget for social overhead capital by 14.2 percent and culture, sports and tourism by 6.3 percent. Instead, the government will likely focus more on decreasing the blind spots in social insurances and increasing the budget for childcare. Following the recent defection of a North Korean soldier across the Joint Security Area in the truce village of Panmunjom, there have been rising calls for establishing a professional treatment system for severe trauma. Reflecting the demand, 20 billion won or 19 million US dollars have been set aside for support for medical trauma centers. A budget increase is also seen in earthquake disaster support. Meanwhile, 38 billion won or 34 million dollars were additionally added to Korea’s defense budget to purchase advanced weapons from the U.S. so the nation can strengthen its defense capabilities.
To improve the quantity and quality of jobs available, the government plans to create 174-thousand new public service jobs in the next five years, increasing the number of public officials by 9,475 next year. The government has earmarked the so-called “job stability” fund of 2.97 trillion won for next year’s minimum wage hike. But the government’s direct support will be provided until 2018 and the form of support will be changed in the following year. In another notable part of the budget, the National Assembly passed the revision plans calling for collecting more taxes from 77 top-earning companies and 90-thousand high-income earners.
To secure necessary funds, the government wants large companies and top-earning individuals to pay more taxes. So it increased the income tax rate for wealthy individuals with more than 500 million won in annual income to 42 percent from the current 40 percent. Also, companies with annual taxable profits of over 300 billion won will face a tax rate of 25 percent, up from the current 22 percent. Some people say that an increase in corporate tax rates goes against the global trend. But as a matter of fact, the actual tax burden on companies in Korea is still lower than that in major economies. It’s necessary to compare relevant figures for G20 nations and statistics by the Organization for Economic Cooperation and Development. According to the U.S. Congressional Budget Office, South Korea’s nominal corporate tax rate is the fifth lowest, after Turkey, Saudi Arabia, Russia and Britain. So the rate remains at the bottom. In terms of the total amount of taxes collected from companies, South Korea is the second-lowest among G20 nations after Italy.
The government is estimated to collect an additional 3.4 trillion won in tax revenue next year by raising tax rates for top-earning individuals and companies. But the business community argues that the corporate tax rate hike runs counter to the global trend. In fact, the U.S. Senate has passed a tax reform bill calling for lowering the top corporate tax rate of 35 percent to 20 percent. Britain cut the rate to 19 percent this year, but will slash it even further to 17 percent by 2020. Japan’s effective corporate tax rate is nearly 30 percent now, but it plans to lower it to 20 percent. In comparison, the Korea Institute of Public Finance shows that South Korea’s effective corporate tax rate in 2013 was 16 percent, which is lower than that of other major economies. As of 2015, Korean companies’ tax burden rate was 33.2 percent, lower than the OECD average of 41.3 percent. Still, the increased tax rate will certainly place a greater burden on local companies in Korea, so the government needs to execute the budget efficiently.
It is necessary to ensure the efficiency of budget execution by funneling money into the right areas. Among the new projects pushed by the Moon government, the job stability fund merits attention. It is aimed at helping small companies ease their cost burden resulting from an increase in the minimum wage. Each company will receive a monthly subsidy of up to 130-thousand won for each employee. The government estimates 3 million people will benefit from the program. Without a carefully-planned system, however, those who are not eligible for the subsidies may exploit the program, while those who are actually entitled to them may not receive the money. Problems like this will be a stumbling block to the soft-landing of the government’s minimum wage policy. That’s why detailed administrative support is essential. Also, young people are looking forward to the plan to hire more public servants. The government has decided to implement the plan two months earlier than initially expected. I think it made the right decision.
The government puts top priority on the creation of jobs in its budget execution and will spend a considerable part of the relevant budget in the first half of next year. The government decided on a budget allocation plan for next year on December 8 so it can administer the budget as soon as the New Year begins. If the plans proceed as scheduled, the Moon government’s economic policies will get into their stride. In order to create more jobs by reforming the tax system and promote welfare by lifting the minimum wage, it is necessary to draw up a specific roadmap for the fourth industrial revolution—a roadmap for encouraging companies to generate jobs more actively. But analysts point out that this part is not outlined in next year’s budget plan.
The success of the Moon government’s economic policies depends on job creation. The government plans to hire 174-thousand public officials during its term. But it is difficult to resolve the youth unemployment problem simply by increasing new public service jobs, given that more than 4.5 million young people remain unemployed. Therefore, it is necessary to focus on creating jobs in the private sector. With the nation’s manufacturing industry losing its competitiveness and its roles diminishing, it is important to change the industrial structure into a healthier one and generate many more quality jobs to help out the unemployed young people. The government began to talk about innovative growth this past autumn, but it has yet to draw up any specific blueprint. In this respect, it is necessary to supplement the job creation policy. Also, the government may have to reform the tax system in a more fundamental way since it might find it difficult to secure financial resources it had initially expected.
The government has started its budget experiment of upgrading the state role through fiscal expansion. It should spend the budget without any setbacks to produce a positive result that clearly shows the effectiveness of the new budget. At the same time, the government will have to come up with ways to secure growth engines to eventually improve the overall economic structure.