Economic Analysis - Supplementary Budget Beginning Of Shift Towards Increased Spending - SEPT 2017

BMI View: While we do not expect South Korea's proposed supplementary budget to have an impact on the government's fiscal position, the speed by which the government has drawn up the proposal indicates the importance of job creation and marks the beginning of a shift towards one of increased spending. We maintain our expectations for the country ' s 2017 operating fiscal deficit to come in at 1.7% of GDP, and do not expect the budget to pass parliament in its existing form due to fierce opposition from the various parties.

The Moon Jae-in administration will present its KRW11.2trn (USD10bn) supplementary budget to South Korea's parliament on June 7. With the government obtaining the funds from existing surpluses, we do not expect the proposed budget to have an impact on the government's fiscal position and expect it will be able to achieve its operating fiscal deficit target of 1.7% of GDP in 2017. The proposed extra budget is aimed at creating jobs and fuelling economic momentum in the economy and is a small fraction of the total 2017 budget of KRW400trn. However, we note that the speed by which the proposal has been drawn up indicates the importance the Moon administration places on creating jobs by fiscal spending after winning the presidential election on May 9, and that this poses downside risks to our forecast for the fiscal deficit to average a modest 0.7% over the next five years. That said, the budget is unlikely to be effective in addressing high levels of youth unemployment as it fails to address the underlying structural issues but instead seeks to drive job creation through an expansion of the public sector. Lastly, the measures are unlikely to be passed in parliament in its existing form due to fierce opposition from various parties and the ruling Minjoo Party of Korea (Minjoo's) lack of a parliamentary majority.

Job Creation A Priority
South Korea - Breakdown Of Supplementary Budget, % Of Total
BMI, Ministry of Strategy and Finance

Summary Of The Supplementary Budget

According to the Ministry of Finance, the proposed extra budget will be used to create jobs, improve working conditions, and stabilise the livelihoods of ordinary people. In addition, KRW3.5trn will be given to provincial governments. According to the Deputy Finance Minister for budget affairs Park Chun-sup, approximately 110,000 jobs would be created through the various programmes under the supplementary budget. In particular, the government is likely to account for a considerable amount of job creation, with the public sector set to create a total of 66,000 new jobs. In addition, the government has plans to set aside KRW1.5trn worth of funds to encourage entrepreneurship.

No Selling Of New Bonds, But Fiscal Policy Becoming Increasingly Expansionary

The government has stated that no additional state bonds will be issued to cover up the extra expenditure. Instead, an excessive KRW8.8trn in tax revenue would meet most of the outlay, with KRW1.1trn worth of surplus carried over from the last fiscal year (2016). As such, we believe that the government will be able to maintain its fiscal deficit target of 1.7% of GDP in 2017, but note that its enthusiasm for job creation through increased spending is yet another step away from the former Park administration's (2013-2017) adherence to fiscal discipline. While we maintain our forecast for South Korea to have a modest fiscal deficit averaging 0.7% over the next five years, we note that the downside risks to our forecast are mounting.

Key Initiatives In The Supplementary Budget
Proposed Initiatives
Source: Ministry of Strategy and Finance
Job Creation Increase jobs in the public sector, SMEs, new growth engines and local industries, encourage startups.
Add 12,000 jobs in the public safety sector, such as policemen, firefighters, and public safety specialists.
Add 24,000 jobs in social services sector, such as daycare teachers and elderly care providers.
Increase government's young startup funds by KRW500bn, and promote developing new ideas into a business such as through the Tech Incubator Program for Startups.
Expand Job Markets Increase jobs for young adults, women and the elderly, support small businesses.
Double the amount of parental leave allowance to 80% of the average paycheck and also double the number of public daycare centers.
Support small businesses: Provide financial support, and help them retry or find jobs if they fail.
Adopt a young job seeker allowance, and encourage young SME employees to keep their jobs by increasing government's matching funds to their asset building accounts.
Support Working Class Strengthen national healthcare, help reduce housing and educational costs, ensure safety and clean air.
Expand basic social security beneficiaries by 41,000: Elderly and disability benefits will be increased.
Provide young adults with affordable rental housing, which will have an easy access to public transportation.
Support Local Governments Increase subsidies for local governments.
Subsidies for local government education spending.

Budget Still Falls Short, Unlikely To Pass In Existing Form

We believe that the government's efforts to tackle high levels of youth unemployment (which stood at 11.2% in April) through its proposed supplementary budget will fall short as it fails to address the structural issues that have contributed to persistently high unemployment. South Korea's relatively rigid labour market and seniority wage-based employment system are key reasons for high levels of youth unemployment, and the government's measures are unlikely to change the country's labour market environment. In addition, the expansion of the public sector and emphasis on the role of the government in providing employment at the expense of the private sector could lead to further fiscal strain over the coming years. Indeed, it is likely that calls for government subsidies will increase as a result of the government's pro-jobs policy. More than 35,000 workers from the shipbuilding industry alone likely to be laid off by the end of 2017 amid the restructuring of the shipbuilding industry, and they are likely to demand some form of government assistance.

Addressing High Youth Unemployment Will Not Be Easy
South Korea - Unemployment, %
BMI, Kosis

In addition, we do not expect the budget to be passed in its original form due to fierce opposition in parliament. The Minjoo party lacks a parliamentary majority (having 120 out of 300 seats) and the move to create jobs through increased government spending has been decried by the main opposition Liberty Korea Party (LKP). The move has also met with opposition from the centrist People's Party, which has tended to ally itself with the Minjoo on various issues. With key opposition parties holding 173 of the 300 seats in parliament, we believe that the passing of the supplementary budget faces considerable obstacles and is unlikely to be passed quickly.