South Korea proposes record spending to deal with pandemic

South Korea Economy updates

South Korea has proposed a budget for 2022 that would maintain aggressive fiscal spending to try and deal with the fallout of the pandemic, as Asia’s fourth-biggest economy struggles to deal with a surge in coronavirus infections.

The finance ministry on Tuesday proposed spending Won604.4tn ($523bn) in 2022, a rise of 8.3 per cent from 2021 that would increase government debt to 50.2 per cent of gross domestic product, from 36 per cent in 2017 when President Moon Jae-in took office.

The aggressive fiscal approach has raised concerns about the sustainability of the country’s stimulus spending but Moon has asserted that the policy must be maintained to deal with a Covid-19 crisis that has been blighted by vaccine shortage.

“We still have a long way to go for the complete recovery and the active role of fiscal spending is still badly needed to cope with massive changes including global supply chain restructuring and changing international trade order,” Moon told a cabinet meeting.

The record spending was announced as the government struggles to rein in surging household debt and rising income inequality. Last week, South Korea became the first big Asian economy to raise interest rates since the start of the pandemic in a bid to stem potential financial imbalances resulting from rising debt levels and rocketing property prices.

The bulk of the proposed 2021 budget would be spent on expanding welfare benefits, creating jobs and developing emerging technologies that can drive growth.

South Korea is on track for GDP growth of 4 per cent this year as booming exports of electronics products, cars and ships have helped rescue the country from recession last year.

Despite the growth in exports, the job market recovery remains sluggish with domestic consumption hit by stricter Covid restrictions as health authorities grapple with the Delta coronavirus variant.

Tackling growing inequality amid signs of an asset bubble has become a deciding factor for the presidential election scheduled for next March. Many self-employed people, who make up almost a third of the labour force, are under mounting financial pressure after tougher coronavirus restrictions, including tighter social-distancing measures, slashed their income.

Moon said South Korea had capacity to sustain its expansionary policy, citing the government’s relatively healthy fiscal status. The country’s general government gross debt ratio will still be less than a third of Japan’s and just half of that for the US by 2025, according to IMF data.

But some experts raised concerns about the fast pace of rising debt as the country faces long-term challenges such as a rapidly ageing population and the world’s lowest birth rates, which could quickly increase South Korea’s fiscal burden in the coming decades.

“This is not a short-term risk factor as the government still has room for more spending. Its debt ratio is still much lower than that of other advanced countries,” said Park Seok-gil, economist at JPMorgan. “But the government may have to adjust the pace of debt increase in the long term, given that South Korea could follow Japan’s growth trajectory.”

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