Korea Economic Update

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South Korea has proposed a budget for 2022, which will maintain active fiscal spending to try to deal with the impact of the pandemic, as Asia’s fourth-largest economy is struggling to cope with the surge in coronavirus infections.

The Ministry of Finance proposed on Tuesday to spend 60.44 billion won ($523 billion) in 2022, an increase of 8.3% over 2021. This will increase government debt as a percentage of GDP from 36% during President Moon Jae-in in 2017 to 50.2% . In taking office.

The aggressive fiscal approach has raised concerns about the sustainability of the country’s stimulus spending, but Moon Jae-in asserted that the policy must be maintained to deal with the cause. Vaccine shortage.

Moon Jae-in said at the cabinet meeting: “We are still a long way from a complete recovery, and fiscal expenditures still need to play an active role to cope with the tremendous changes including the reorganization of the global supply chain and changes in the international trade order.”

The record-breaking spending was announced as the government tried to control rising household debt and rising income inequality.Last week, South Korea became the first Asian economy Raise interest rates Since the beginning of the pandemic, to curb potential financial imbalances caused by rising debt levels and soaring real estate prices.

Most of the proposed budget for 2021 will be used to expand welfare, create jobs, and develop emerging technologies that can drive growth.

As the booming exports of electronic products, automobiles and ships helped South Korea get rid of last year’s recession, South Korea’s GDP growth this year is expected to achieve 4%.

Despite the increase in exports, as health authorities struggle to deal with the Delta coronavirus variant, domestic consumption has been hit by stricter Covid restrictions, and the job market is still recovering slowly.

Resolving the growing inequality under the signs of asset bubbles has become a decisive factor in the presidential election scheduled to be held in March next year. After stricter coronavirus restrictions (including stricter social distancing measures) cut their incomes, many self-employed individuals who account for nearly one-third of the workforce are facing increasing financial pressure.

Moon Jae-in said that South Korea has the ability to maintain its expansion policy on the grounds that the government’s financial situation is relatively healthy. According to data from the International Monetary Fund, by 2025, Japan’s general government debt ratio will still be lower than one-third of Japan’s and only half of that of the United States.

However, some experts expressed concern about the rapid growth of debt because the country faces long-term challenges such as a rapidly aging population and the world’s lowest birth rate, which may rapidly increase South Korea’s financial burden in the coming decades.

“This is not a short-term risk factor, because the government still has room to increase spending. Its debt ratio is still far lower than other developed countries,” said Park Seok-gil, an economist at JPMorgan Chase. “But given that South Korea may follow Japan’s growth trajectory, in the long run, the government may have to adjust the pace of debt growth.”