South Korea's fiscal surplus may narrow to 0.6% in 2019

The decrease came as the government is tipped to splash out $250b to boost job growth.

South Korea’s fiscal surplus as a share of gross domestic product (GDP) is forecasted to narrow to 0.6% in 2019 from an estimated 1.2% in 2018, according to a report by Fitch Solutions.

This is due to an expected 9% growth in the country’s fiscal expenditure in 2019 which is slightly higher than the government’s forecast of 8.7%. On the other hand, fiscal revenue is set to grow by 5.8% in 2019 which is significantly lower than the 8.5% figure recorded in the first 11 months of 2018 on the back of slowing economic growth.

“The pace of spending growth will remain high as finance minister Hong Nam Ki stated that the government is determined to run expansionary fiscal policy in 2019,” Fitch Solutions highlighted. South Korea’s fiscal expenditure rose 8.4% YoY on a three-month moving average basis in November 2018, compared to 5.1% in 2017.

Also read: Korean firms cut hiring amidst higher wages

The government also announced on 11 December 2018 that it would be frontloading $250b (KRW281t) in the first half of 2019 in a bid to boost job growth through various measures such as subsidies for firms hiring young adult employees and increased job training support for unskilled employees. 

South Korea’s labour market reportedly weakened in 2018 with the number of new jobs added monthly declining to an average of 97,000 from the 316,000 seen in 2017. This was attributed to the 16.4% wage hike that was implemented at the start of 2018, Fitch Solutions explained.

Also read: South Korean car sales to hit roadblock amidst high youth unemployment

“A weaker labour market would weigh directly on income taxes, which account for 15% of total tax revenues, as well as goods and services tax (GST) collection which accounts for 31% of total revenues as households cut back on their spending,” Fitch Solutions commented.

Minimum wages are expected to increase 10.9% in a bid to weight on the labour market and profit margins for businesses during a time of uncertainty.

Given the government’s efforts to enhance welfare and employment spending, the report further noted that there is a rising change for a supplementary budget to be passed in South Korea in 2019. “Supplementary budgets have been passed in South Korea over each of the past four years, with the latest supplementary budget passed in May 2018 worth $3.39b (KRW3.8t) which is about 0.2% of GDP,” Fitch Solutions explained. 

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