Fiscal balance unlikely during Park’s term

The Park Geun-hye administration unveiled its first spending proposal, a deficit budget amounting to 25.9 trillion won (24.05 billion U.S. dollars), for 2014. With the new proposal, Korea’s total national debt is projected to surpass 500 trillion won (464.47 billion dollars) for the first time in the nation’s history. Such an increase is attributed to the government’s increased spending on social welfare and economic stimulation despite a decrease in expected revenue under weak economic conditions.

The government confirmed the “2014 Budget Proposal” and “2012-2016 Mid-term Financial Plan” in a cabinet meeting on Thursday and will submit the plans to the National Assembly by Wednesday next week. According to the proposal, government’s total revenue next year is 370.7 trillion won (344.36 billion dollars), down 1.9 trillion won (1.76 billion dollars) from this year while total spending is up 15.7 trillion won (14.58 billion dollars) to 357.7 trillion won (332.28 billion dollars). The balance of managed state finance, which subtracts a surplus in social security funds, such as national pension and employment insurance, from the balance of total government finance is 25.9 trillion won (24.05 billion dollars) in deficit, which is the largest since 2009 when the deficit was 43.2 trillion won (40.13 billion dollars) right after the global financial crisis. The Ministry of Strategy and Finance forecast that the deficit would continue to increase throughout Park’s term and reach 7.4 trillion won (6.87 billion dollars) in 2017, the president’s last year in office. This announcement can be interpreted that the government no longer expects to make ends meet and achieve a financial balance within its five-year term.

In detail, social welfare budget of 105.09 trillion won (97.22 billion dollars) accounts for 29.4 percent of the total, a record high in its proportion. However, budgets for major welfare pledges – basic pension, treatment for four major sever diseases, cutting college tuition in half and free high school education – were cut from the original plans, sparking criticisms from opposition parties. Vice Prime Minster and Finance Minister Hyun Oh-seok said, “(We) cut down budget for some welfare plans on a judgment that economic stimulation is important.”

As unveiling its campaign pledge book in late May, the government restructured spending plans on R&D and social overhead capital projects such as roads, railways and ports, and announced that it would enhance the nation’s fiscal health. However, it turned out in the proposal that the SOC budget previously planned to be lowered by 3 trillion won (2.78 billion won) was reduced only by one trillion won (92.89 million dollars) and the R&D budget was even increased by 600 billion won (55.73 million dollars). The national debt, which amounts to 515.2 trillion won (478.42 billion dollars) this year, is projected to continuously increase and reach 610 trillion won (566.65 million dollars) in 2017. The national debt relative to GDP will also increase to 36.5 percent next year from 36.2 percent this year. The Finance Ministry forecast the ratio will reach 35.6 percent in 2017, giving up its goal of lowering the debt-to-GDP ratio below 30 percent.