Public spending restructuring seeks budget cut of $92 billion

The government will restructure public spending to cut 100 trillion won (91.8 U.S. billion dollars) in budget over the next five years to prepare a portion of the 135 trillion won (123.9 billion dollars) needed to implement President Park Geun-hye`s welfare pledges.

The president said 72.9 trillion won (67 billion dollars) will be created through spending restructuring, and the government plans to raise an additional 27 trillion won (24.8 billion dollars).

According to the Strategy and Finance Ministry on Tuesday, up to 20 percent of the social infrastructure and industrial sector budget will be cut from the amount written in the fiscal roadmap of the National Fiscal Operation Plan. Another 10 percent has been decided to cut from discretionary spending, excluding welfare.

The president`s major pledges exclude large-scale civil engineering projects such as the four-river restoration and relocation of the capital, and she made no large pledges on industries. This could mean a high possibility of cutting social infrastructure and industrial spending. A ministry official said, "We`re working on reducing budget centering on projects instead of the president`s pledges."

If the budget restructuring is promoted as planned, discretionary spending among government budget is likely to decrease around 20 trillion won (18.4 billion dollars) from next year. The spending cuts in the process of executing this year`s budget, around 5 trillion won (4.6 billion dollars), and that reduced by introducing interest subsidies in a fiscal loan project worth 27 trillion won (24.8 billion dollars), or 7 trillion won (4.6 billion dollars), will amount to a cut of 100 trillion won (91.8 billion dollars) over the next five years.

The fiscal loan project seeks to lend public funds to execute government policies to the private sector. Government interest subsidies can reduce budget injection as the government lends to the private sector while supporting a portion of the interest paid by the policy beneficiary. The government will use the reduced budget to execute President Park`s welfare pledges.

The target for spending restructuring is higher than President Park`s planned amount of 72.9 trillion won (67 billion dollars) to prepare for possible demand for new spending. The ruling Saenuri Party estimated that 135 trillion won (123.9 billion dollars) is needed to execute the president`s 163 pledges, and did not present the amount needed to execute 97 pledges for the provinces.

A ministry official said, "It`s hard to estimate how much budget is needed to execute pledges for the provinces, and we have to prepare for possible requests from municipalities to cover spending with state coffers," adding, "It`s important to reduce the amount to be spent as much as possible."

Whether 20 trillion won (18.4 billion dollars) can be cut per year is unknown, however, given precedents of expenditure restructuring. The former Lee Myung-bak administration ordered ministries to cut discretionary spending 10 percent, but the reduction amount was 2.9 trillion won (2.7 billion dollars) in 2012 and 5.6 trillion won (4.6 billion dollars) in 2010.

Annual discretionary spending was around 170 trillion won (156 billion dollars) under the Lee administration, and 17 trillion won (15.6 billion dollars) had to be reduced if the guidelines were to be met. The reduction amount, however, was just half of the 17 trillion won.

buddy@donga.com