{"id":2198923,"date":"2022-09-12T07:17:13","date_gmt":"2022-09-12T07:17:13","guid":{"rendered":"https:\/\/www.nknews.org\/koreapro\/?p=2198923"},"modified":"2023-04-05T16:11:38","modified_gmt":"2023-04-05T07:11:38","slug":"south-korea-reins-in-budget-spending-in-face-of-demographic-time-bomb","status":"publish","type":"post","link":"https:\/\/koreapro.org\/2022\/09\/south-korea-reins-in-budget-spending-in-face-of-demographic-time-bomb\/","title":{"rendered":"South Korea reins in budget spending in face of demographic time bomb"},"content":{"rendered":"<p><span style=\"font-weight: 400;\">The South Korean government has recently unveiled its 2023 budget, which President Yoon Suk-yeol will soon submit to the National Assembly. The country is in an unusual fiscal position compared to the average developed country, with less debt, a smaller government and more net government and public sector wealth.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">But after escaping COVID-19 economic shocks that plagued many other advanced economies, South Korea now faces a far worse fiscal future because of rapid population aging and rising associated costs. This year\u2019s budget represents a 5% increase on the original budget of 2022, but a 6% decrease if supplementary budget appropriations are also included in calculations.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In reality, if the rate of <\/span><a href=\"https:\/\/www.index.go.kr\/potal\/main\/EachDtlPageDetail.do?idx_cd=1060\"><span style=\"font-weight: 400;\">consumer price inflation<\/span><\/a><span style=\"font-weight: 400;\"> and <\/span><a href=\"https:\/\/www.index.go.kr\/potal\/main\/EachDtlPageDetail.do?idx_cd=1061\"><span style=\"font-weight: 400;\">producer price inflation<\/span><\/a><span style=\"font-weight: 400;\"> are accounted for, a nominal 5% increase in the budget may actually represent a real term decline. The new government slowed the pace of growth in government outlays from the 8.7% average between 2018 and 2022.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A <\/span><i><span style=\"font-weight: 400;\">Korea Pro <\/span><\/i><span style=\"font-weight: 400;\">analysis of the South Korean budget reveals:\u00a0<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The size of the state remains significantly smaller than the (Organization for Economic Co-operation and Development) OECD average, with significantly lower levels of social spending.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">South Korea\u2019s national debt remains low, though it\u2019s rising and the new government seeks to stop its growth.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Long-term fiscal health is in doubt because of population aging, though a number of reforms to the pension system may help to keep it solvent.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The current budget cuts taxes by raising <\/span><a href=\"https:\/\/eiec.kdi.re.kr\/policy\/materialView.do?num=229482&amp;topic=\"><span style=\"font-weight: 400;\">deductions<\/span><\/a><span style=\"font-weight: 400;\"> on corporate and income tax. The scale of the cuts equates to around 1% of the budget in 2020.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The administration has called for a 4.6% increase in the defense budget, mostly due to increased pay for ROK soldiers. This means the rest of the budget will likely see a real-term decline due to inflation.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The budget includes a 4.1% increase in welfare spending, including increases in the size and scope of welfare payments to the needy, the disabled and the elderly. These include large increases in spending on basic welfare payments and health care for the needy.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">Increases in budgets for the environment (3.9%) and R&amp;D (3.0%) include more funding for carbon emissions reduction.<\/span><\/li>\n<li style=\"font-weight: 400;\" aria-level=\"1\"><span style=\"font-weight: 400;\">The budget includes large decreases in industry (18.0%), social overhead capital (SOC) (10.2%) and culture budgets. The former is largely explained by the expiration of COVID-19 support, while the central government has handed over a significant amount of the SOC and culture budget allocations to regional governments.<\/span><\/li>\n<\/ul>\n<div id=\"attachment_2198926\" style=\"width: 945px\" class=\"wp-caption aligncenter\"><img decoding=\"async\" aria-describedby=\"caption-attachment-2198926\" class=\"wp-image-2198926 size-post_feature_image\" src=\"https:\/\/www.nknews.org\/koreapro\/wp-content\/uploads\/sites\/6\/2022\/09\/MOEF-briefing-on-23spending-1-935x500.jpeg\" alt=\"\" width=\"935\" height=\"500\" srcset=\"https:\/\/assets.korearisk.com\/uploads\/sites\/6\/2022\/09\/MOEF-briefing-on-23spending-1-935x500.jpeg 935w, https:\/\/assets.korearisk.com\/uploads\/sites\/6\/2022\/09\/MOEF-briefing-on-23spending-1-1255x670.jpeg 1255w, https:\/\/assets.korearisk.com\/uploads\/sites\/6\/2022\/09\/MOEF-briefing-on-23spending-1-1870x1000.jpeg 1870w\" sizes=\"(max-width: 935px) 100vw, 935px\" \/><p id=\"caption-attachment-2198926\" class=\"wp-caption-text\">Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is presenting the government&#8217;s 2023 budget at Government Complex in Sejong on Aug. 25, 2022 | Image: <a href=\"https:\/\/www.moef.go.kr\/nw\/mosfnw\/photoDetail.do?searchNttId1=MOSF_000000000060828&amp;menuNo=4020000#\">Ministry of Economy and Finance<\/a><\/p><\/div>\n<p><b>ROK FISCAL POSITION<\/b><\/p>\n<p><span style=\"font-weight: 400;\">South Korea is in an unusual fiscal position by the standards of Europe, North America and much of the OECD. Over the past two decades, it has consistently had a significantly <\/span><a href=\"https:\/\/data.oecd.org\/gga\/general-government-spending.htm#indicator-chart\"><span style=\"font-weight: 400;\">smaller<\/span><\/a><span style=\"font-weight: 400;\"> government as a percentage of gross domestic product (GDP), and its government debt is also far <\/span><a href=\"https:\/\/data.oecd.org\/gga\/general-government-debt.htm#indicator-chart\"><span style=\"font-weight: 400;\">smaller<\/span><\/a><span style=\"font-weight: 400;\"> than the average.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The Korean government is also far <\/span><a href=\"https:\/\/data.oecd.org\/gga\/general-government-financial-wealth.htm#:~:text=The%20net%20financial%20worth%20of,well%20as%20social%20security%20funds.\"><span style=\"font-weight: 400;\">wealthier<\/span><\/a><span style=\"font-weight: 400;\"> than average, and the net asset position of the broader public sector has also <\/span><a href=\"https:\/\/www.index.go.kr\/potal\/main\/EachDtlPageDetail.do?idx_cd=1100\"><span style=\"font-weight: 400;\">improved<\/span><\/a><span style=\"font-weight: 400;\"> over the past five years.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Further, <\/span><a href=\"https:\/\/stats.oecd.org\/Index.aspx?QueryId=51643\"><span style=\"font-weight: 400;\">deficit spending<\/span><\/a><span style=\"font-weight: 400;\"> during the pandemic has been far more circumscribed than much of the rest of the developed world because lockdowns have had far less effect on the economy.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">At the same time, the size of the government has increased considerably in the past five years, with annual spending growth reaching a remarkable 8.7% per annum under the Moon Jae-in government. The <\/span><a href=\"https:\/\/www.hankyung.com\/economy\/article\/2022080873681#:~:text=%EB%82%B4%EB%85%84%20%EC%98%88%EC%82%B0%20%EC%A6%9D%EA%B0%80%EC%9C%A8%EC%9D%84%20%EB%B3%B8%EC%98%88%EC%82%B0,%EB%A5%BC%20%EB%90%98%EB%8F%8C%EB%A6%AC%EB%8A%94%20%ED%96%89%EB%B3%B4%EB%8B%A4.\"><span style=\"font-weight: 400;\">stock<\/span><\/a><span style=\"font-weight: 400;\"> of government debt has also increased by well over 60% in that time and the stock of debt relative to GDP <\/span><a href=\"https:\/\/www.joongang.co.kr\/article\/25003009#home\"><span style=\"font-weight: 400;\">increased<\/span><\/a><span style=\"font-weight: 400;\"> 14 percentage points \u2014 more than double any of the last three governments.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">One of the main reasons for this is that the <\/span><a href=\"https:\/\/www.index.go.kr\/potal\/main\/EachDtlPageDetail.do?idx_cd=1122\"><span style=\"font-weight: 400;\">tax burden<\/span><\/a><span style=\"font-weight: 400;\">, even though it has risen, has not kept up with budgetary expense growth. Even when social insurance is <\/span><a href=\"https:\/\/www.joongang.co.kr\/article\/25003009#home\"><span style=\"font-weight: 400;\">included<\/span><\/a><span style=\"font-weight: 400;\">, the burden has only increased by 1.2 percentage points of GDP from 2017 (and remains historically <\/span><a href=\"https:\/\/kosis.kr\/statHtml\/statHtml.do?orgId=101&amp;tblId=DT_2KAA707_OECD\"><span style=\"font-weight: 400;\">low<\/span><\/a><span style=\"font-weight: 400;\"> by OECD standards). There is now growing talk of reforming pensions due to rapid population aging, including the <\/span><a href=\"https:\/\/www.hankyung.com\/opinion\/article\/2022090786501\"><span style=\"font-weight: 400;\">depoliticization<\/span><\/a><span style=\"font-weight: 400;\"> of appointments to the leadership of the fund (to maximize returns), and <\/span><a href=\"https:\/\/www.mk.co.kr\/opinion\/contributors\/view\/2022\/09\/792550\/\"><span style=\"font-weight: 400;\">raising<\/span><\/a><span style=\"font-weight: 400;\"> both contributions and the retirement age cumulatively over the coming decades.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The government budget rose from 400 trillion won ($289.5 billion) in 2017 to 600 trillion in 2022 (not including supplementary budget outlays). This included significant <\/span><a href=\"https:\/\/www.index.go.kr\/potal\/main\/EachDtlPageDetail.do?idx_cd=2739\"><span style=\"font-weight: 400;\">increases<\/span><\/a><span style=\"font-weight: 400;\"> in welfare spending (in a country known for the <\/span><a href=\"https:\/\/www.oecd.org\/social\/expenditure.htm#:~:text=Expenditure%20for%20Social%20Purposes&amp;text=On%20average%20public%20social%20spending,20%25%20of%20GDP%20in%202019.\"><span style=\"font-weight: 400;\">spartan<\/span><\/a><span style=\"font-weight: 400;\"> state of its welfare programs). This in a time when the economy was growing points to a lack of political willingness to address the need for more government revenue in a country that is unusually <\/span><a href=\"https:\/\/taxfoundation.org\/oecd-tax-revenue-2022\/#:~:text=In%20general%2C%20OECD%20countries%20lean,taxes%20has%20shifted%20over%20time.\"><span style=\"font-weight: 400;\">reliant<\/span><\/a><span style=\"font-weight: 400;\"> on corporate taxes relative to much of the OECD. Generally, more comprehensive welfare states are more reliant on a combination of a high, progressive <\/span><a href=\"https:\/\/taxfoundation.org\/publications\/comparison-tax-burden-labor-oecd\/\"><span style=\"font-weight: 400;\">income tax<\/span><\/a><span style=\"font-weight: 400;\"> with fewer deductions and high rates of <\/span><a href=\"https:\/\/www.oecd-ilibrary.org\/sites\/152def2d-en\/1\/3\/1\/index.html?itemId=\/content\/publication\/152def2d-en&amp;_csp_=c74456d46ecc7b2f6fd3352bb00363ec&amp;itemIGO=oecd&amp;itemContentType=book\"><span style=\"font-weight: 400;\">value-added taxation<\/span><\/a><span style=\"font-weight: 400;\"> (VAT).<\/span><\/p>\n<p><span style=\"font-weight: 400;\">At the same time, South Korea\u2019s long-term fiscal health is very much in doubt, though it is not as if the developed world is a <\/span><a href=\"https:\/\/data.oecd.org\/gga\/general-government-debt.htm#indicator-chart\"><span style=\"font-weight: 400;\">paragon<\/span><\/a><span style=\"font-weight: 400;\"> of fiscal health, where long-term GDP growth, tax revenue and debt prospects look far from uplifting according to current <\/span><a href=\"https:\/\/www.oecd.org\/economy\/growth\/scenarios-for-the-world-economy-to-2060.htm\"><span style=\"font-weight: 400;\">projections<\/span><\/a><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The Yoon government has signaled this is the first budget in its plans for fiscal retrenchment, which will scale back the previous Moon government\u2019s projections for government debt growth and <\/span><a href=\"https:\/\/www.hankyung.com\/economy\/article\/2022083089481\"><span style=\"font-weight: 400;\">stabilize<\/span><\/a><span style=\"font-weight: 400;\"> the debt burden at around 50% of GDP.<\/span><\/p>\n<div id=\"attachment_2198925\" style=\"width: 1880px\" class=\"wp-caption alignnone\"><img decoding=\"async\" aria-describedby=\"caption-attachment-2198925\" class=\"size-full wp-image-2198925\" src=\"https:\/\/www.nknews.org\/koreapro\/wp-content\/uploads\/sites\/6\/2022\/09\/Yoon-with-soldiers.jpeg\" alt=\"\" width=\"1870\" height=\"1058\" \/><p id=\"caption-attachment-2198925\" class=\"wp-caption-text\">South Korean President Yoon Suk-yeol has lunch with soldiers working during the Chuseok holiday in Seoul on Sept. 10, 2022 | Image: <a href=\"https:\/\/www.president.go.kr\/ko\/contents_new_view.php?code=161467&amp;sno=&amp;opt=&amp;id=people&amp;search_item=&amp;search_keyword=\">Office of the 20th President<\/a><\/p><\/div>\n<p><b>MAJOR BUDGET ITEMS<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Consumer price inflation currently stands at over 6%, and when accounted for, South Korea is cutting every major line item in the budget this year. Some government procurement price inflation will probably be closer to producer price inflation, which is far <\/span><a href=\"https:\/\/www.index.go.kr\/potal\/main\/EachDtlPageDetail.do?idx_cd=1061\"><span style=\"font-weight: 400;\">higher<\/span><\/a><span style=\"font-weight: 400;\">, and this would mean even larger cuts.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">A major part of the new budget is the raising of tax deductions for households and firms, which will <\/span><a href=\"https:\/\/biz.chosun.com\/policy\/policy_sub\/2022\/08\/30\/R7SHXGEVVJASLJ4LK6D2USQSDY\/\"><span style=\"font-weight: 400;\">raise<\/span><\/a><span style=\"font-weight: 400;\"> deductions by 10% on the previous year. Revenue will still increase, as the size of the economy continues to grow. The deductions were raised to deal with the problem of <\/span><a href=\"https:\/\/www.investopedia.com\/terms\/b\/bracketcreep.asp\"><span style=\"font-weight: 400;\">bracket creep<\/span><\/a><span style=\"font-weight: 400;\">, with South Korean tax brackets not automatically <\/span><a href=\"https:\/\/www.hankyung.com\/economy\/article\/2022020765851\"><span style=\"font-weight: 400;\">adjusting<\/span><\/a><span style=\"font-weight: 400;\"> for inflation (deductions remained the same for 15 years even as consumer prices rose 35% over that period).\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Additional changes to rates would require further primary legislation, and slated plans to cut corporation tax rates are apparently <\/span><a href=\"https:\/\/biz.newdaily.co.kr\/site\/data\/html\/2022\/09\/07\/2022090700108.html\"><span style=\"font-weight: 400;\">unpopular<\/span><\/a><span style=\"font-weight: 400;\"> with the opposition party, which is also the majority party in the National Assembly.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Aside from revenue, the budget also makes a number of substantive changes to spending on significant line items.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">These include a 4.6% increase in the defense budget, with much of the increase in spending going on raises in the salaries and benefits of enlisted soldiers (combined salary and benefits from 820,000 won a month to 1.3 million won). Inflation may mean a real-term cut in defense procurement budgets, as it does <\/span><a href=\"https:\/\/www.defensenews.com\/opinion\/commentary\/2022\/06\/21\/worried-about-inflation-and-the-defense-budget-a-continuing-resolution-could-make-things-worse\/\"><span style=\"font-weight: 400;\">elsewhere<\/span><\/a><span style=\"font-weight: 400;\">.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Alongside defense, the Yoon government plans a 4.1% increase in welfare spending. This mainly involves broadening the scope and size of welfare payments to the needy, the disabled and the old. In particular, direct payments and health care support are set to rise, though here again it is unclear what the overall impact of inflation might be, especially on direct payments given the number of beneficiaries in an aging society.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">With respect to industry, the Yoon government has decided to prioritize environmental (3.9%) and R&amp;D (3.0%) budgets, with a particular interest in climate change-related funding. Conversely, it is making significant cuts to infrastructure investment (SOC) and other industrial projects.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Some of these cuts relate to temporary COVID-relief programs. And a sizable portion involves scaling back existing programs aimed at improving the urban landscape and handing over SOC-related projects to regional governments. There will also be less investment in rail, roads and industrial parks and logistics, as well as port facilities (detailed information available <\/span><a href=\"https:\/\/eiec.kdi.re.kr\/policy\/materialView.do?num=229481&amp;topic=\"><span style=\"font-weight: 400;\">here<\/span><\/a><span style=\"font-weight: 400;\">). The overall impact is likely to depress investment and may also hurt regional government balance sheets.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The big takeaway from next year\u2019s budget is that it includes a range of cuts that will help to stabilize the country\u2019s medium-term fiscal position, but it will also involve pain for industry, likely cuts to military investment and may do less to help the poor and needy than headline figures imply. It will also bring some tax relief to voters, though this help will be concentrated in upper-income households and larger firms.<\/span><\/p>\n<p><i><span style=\"font-weight: 400;\">Edited by Arius Derr<\/span><\/i><\/p>\n<div class=\"content-tags\"><a href=\"https:\/\/koreapro.org\/tag\/business-economy\/\"><span class=\"tag\">Business &amp; Economy<\/span><\/a><a href=\"https:\/\/koreapro.org\/tag\/domestic-politics\/\"><span class=\"tag\">Domestic Politics<\/span><\/a><\/div>","protected":false},"excerpt":{"rendered":"<p>The South Korean government has recently unveiled its 2023 budget, which President Yoon Suk-yeol will soon submit to the National Assembly. The country is in an unusual fiscal position compared to the average developed country, with less debt, a smaller government and more net government and public sector wealth.\u00a0 But after escaping COVID-19 economic shocks [&hellip;]<\/p>\n","protected":false},"author":7824,"featured_media":2198927,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[21],"tags":[24,27],"class_list":["post-2198923","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-analysis","tag-business-economy","tag-domestic-politics"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v23.7 - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>South Korea reins in budget spending in face of demographic time bomb - Korea Pro<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/koreapro.org\/2022\/09\/south-korea-reins-in-budget-spending-in-face-of-demographic-time-bomb\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"South Korea reins in budget spending in face of demographic time bomb - Korea Pro\" \/>\n<meta property=\"og:description\" content=\"The South Korean government has recently unveiled its 2023 budget, which President Yoon Suk-yeol will soon submit to the National Assembly. 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