South Korea spends to avoid Japan-style stagnation

As South Korea's economy continues to stutter, finance minister Choi Kyung-hwan is anxious that the country could end up in a similar situation to Japan, with a "lost 20 years", unless it acts more aggressively in boosting economic growth.

So it plans to spend a record 376 trillion won (€280 billion) next year and delay reaching a surplus by at least two years as the government increases support for a slowing economy.

It’s the biggest economic stimulus since the global financial crisis in 2009 and the extra spending will expand South Korea’s deficit to 2.1 per cent of gross domestic product in 2015, the finance ministry said in its budget proposal.

Fiscal spending is set to grow by an average of 4.7 per cent each year for the 2015-2017 period.

Mr Choi was named finance minister in June and has repeatedly warned that Asia's fourth-largest economy risked heading into a slump similar to that in Japan.

One of his first measures after taking office in July was to bring in aggressive stimulus measures, including a relaxation of restrictions on mortgages and nearly €9 billion in a public spending package. He also pushed the central bank to lower interest rates in August.

He said last week that this kind of expansionary fiscal policy could run for a number of years, given that next year’s economic growth might not be significant.

A big dampener on economic sentiment in South Korea was the Sewol ferry tragedy, and one of the big spending increases is on public safety, up 7.1 per cent to 16.9 trillion won.

There have been dire warnings coming from the Korean government, but it is striking how years of fiscal rectitude and careful planning have paid off and Korea looks in good shape fiscally. Some of the statistics would be very welcome in Ireland.

The expanded budget will further increase Korea’s outstanding debt to about 570 trillion won next year, or 35.7 per cent of the country’s gross domestic product, but the government said it would aim to reform the economy to improve the fiscal situation.

The government will also increase spending to spur job creation by 7.6 per cent. South Korea’s unemployment rate stands at about 3.5 per cent.

Next year, spending will increase 5.7 per cent to 376 trillion won, more than a 4.0 per cent rise set for this year and a 3.5 per cent gain marked under a previous medium-term fiscal management plan.