South Korea’s economy is increasingly relying on government spending for growth as the private sector loses vitality. Economists point out that repeated short-term stimuli will only weaken fiscal health.
According to the Korea Development Institute, the government spending made up nearly one-third of economic growth last year?the country’s GDP marked 2.6% growth, 0.8 percentage points of which was owed to government financing. In other words, the economy would have grown only 1.8% without this, Yonhap reported.
The role of the government has been expanding notably. Its contribution to economic growth was 0% for 2011 when the economy marked 3.7% growth, but it surged to 0.4 percentage points of 2.3% growth in 2012 and to 0.8 percentage points of 2.6% last year. It is expected to rise further this year.
The country saw its GDP grow 0.5% in the first quarter this year, and government contributions covered this, while the private sector’s contributions were zero.
The private sector, which has been suffering under a global recession for the past few years, is losing its stake in economic growth. Facility investment has continued decreasing this year and exports are also falling. Corporate restructuring in the shipbuilding and shipping industries is also hurting consumer sentiment.
Supplementary Budget
As a consequence, the government is resorting to short-term stimulus measures to sustain the economy. Following the 17.3 trillion won (around $16 billion) supplementary budget in 2013, the government set an 11.6 trillion won supplementary budget last year. This year’s supplementary budget is scheduled to reach 11 trillion won.
While many experts agree an expansionary fiscal policy is necessary to cope with worsening macroeconomic conditions, it raises concerns over deteriorating fiscal soundness. Government debt increased to 590 trillion won last year from 443 trillion won in 2013. Experts thus say that supplementary budgets should be limited to exceptional situations.
Economists also point out that repetition of short-term measures will only lead to ineffectiveness. The economy needs a fundamental overhaul.
LG Economic Research Institute estimated that the supplementary budget won’t be enough for an economic rebound.
“It would be difficult for the South Korean economy to bottom up,” the institute noted in a report. “With the working age population starting to decrease and the aging of the workforce, the economy will only continue to lose vitality.”
It stressed that the government should set a fiscal plan that is sustainable since an expansionary fiscal policy can hurt fiscal soundness amid low economic growth potential.
