Budget 2008: Welfare and Defence Dominate South Korea's Budget
By Lawrence Makovich, Jone-Lin Wang, Kenneth Yeasting, and David Hobbs
Global Insight Perspective
The government handed down its FY 2008 Budget, featuring increases in defence and welfare spending.
The budget's framework seeks to consolidate President Roh Moo-Hyun's legacy before he steps down in February 2008, and attempts to provide a platform for left-leaning parties ahead of general elections in December.
The planned rise in spending, although dismissed by the government as non-expansionary, should provide a cushion for growth as external risks intensify in the wake of the U.S. sub-prime loan crisis.
Mildly Expansive Framework
The government handed down its 2008 Budget today. The 257.3-trillion-won (US$280 billion) package features increases in both defence and welfare spending, which is largely unsurprising as South Korea heads to the polls later this year. Predicated on an annual economic growth rate of 4.6%, total expenditure is expected to rise by 6.4% from the previous year to 238.5 trillion won. Total revenues are forecast at 251.8 trillion won—a 7.0% increase in annual terms. If the targets are realised, the consolidated budget balance will move back into the black after recording a marginal deficit in 2006—equivalent to -0.1% of GDP. Public debt levels are expected to remain relatively constant at around 23.5%.The Minister of Planning and Budget insisted that the framework was not expansionary relative to growth rates forecast for next year.
Implications and Outlook
Welfare Spending and Defence Feature Prominently
Social welfare spending is set to rise by 10.0% in annual comparisons to 67.5 trillion won, with state support for the elderly and childcare provision emphasised. The government also aims to tackle recent sharp increases in real estate prices by increasing the supply of rental housing. Affordability issues have become increasingly acute as metropolitan areas in particular have experienced mini-booms. A target of one million units for national rental housing has been set for the end of 2012, while public rental housing will be increased by half a million units. Expenditure on housing of 13.99 trillion won will account for 17.0% of the overall social welfare budget. Public pension provision, at 18.98 trillion won, accounts for the largest tranche of welfare spending (30.7% of the total). The education portfolio is also prioritised along with research and development as policy-makers seek to boost higher value-added and knowledge-based industries as low-end manufacturing faces long-term attrition from emerging markets. Education spending will rise by 13.6% on the year in 2006 to 35.7 trillion won.
Perhaps the most interesting facet of the budget is the planned 9.0% increase in defence spending to 24.7 trillion won following the 9.7% rise in spending this year. Total defence spending now accounts for 15.2% of the overall budget. Much of the extra spending is concentrated in improving force capability with major investments planned in F-15K fighter jets and 3,000 tonne-rate submarines. Other planned procurement includes the development of intelligence-gathering unmanned vehicles (UAV), tank landing ships, and fighting vehicles for mobile infantry units. The government also revealed that it intends to almost double spending on defence-force improvement by 2010 from the level of 5.79 trillion won recorded in 2006. The sharp hike may ostensibly appear anomalous given the recent re-engagement of North Korea in the disarmament process. However, the trends in military spending are shaped more by the ongoing strategic realignment in the region. In 2012, the United States will transfer wartime military command to South Korea, requiring a massive overhaul of the military's organisational structure. In turn, the First and Third Armies will be upgraded into a ground forces command, backed by the reorganisation of the Second Army to function as a rear operational command, each being equipped with digital warfare systems. The Ministry of Defence is seeking to cut the number of personnel by upgrading weapons technology, responding to the evolving security environment. Establishing an independent command for domestic forces has been a key policy tenet of the Roh government. Pressure to upgrade force capability and projection is also coming externally as neighbouring China and Japan embark on major defence spending initiatives.
Crafting a Legacy
The budget precedes lynchpin elections, which are scheduled for December 2007. Although President Roh is not running for re-election and the ruling Uri party has disbanded, the budget seeks to coalesce the issues that will provide a platform for the left-leaning opposition to the Grand National Party (GNP) from which the United National Democratic Party (UNDP) has emerged as the largest single bloc. The budget framework also seeks to enshrine Roh's legacy, as the first leftist president in the post-war era, to establish the country's autonomy over its defence and foreign policy while creating a greater emphasis on social equity and welfare. The success of that drive is still open to debate.
Ballast Against Building External RisksThe planned rise in spending, although dismissed by the government as non-expansionary, should provide a cushion for growth as external risks intensify in the wake of the U.S. sub-prime loan crisis. Domestic demand growth has gained traction in recent quarters as private consumption finally recovered from the collapse of the consumer credit bubble in 2002. However, robust exports still remain a key driver of growth. A more expansionary fiscal position may prove apposite, therefore, in providing ballast against any downturn. The moderately expansive fiscal policy will complement the pro-growth stance maintained by the Bank of Korea (BoK) in monetary policy. Although interest rates started to rise from mid-2007 onwards, the rate of increase will be highly gradual, with the current retrenchment in global liquidity boosting the case for caution.
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