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S. Korea Plans Smallest Deficit in Six Years as Growth Slows

Lee Myung Bak, South Korea's president. Source: Yonhap News via Bloomberg
Lee Myung Bak, South Korea's president. Source: Yonhap News via Bloomberg

South Korea’s government plans to cut its fiscal deficit next year to the smallest in six years as policy makers preserve firepower amid a slowing global economy and rising welfare costs.

Total spending will increase 5.3 percent to 342.5 trillion won ($306 billion), the Ministry of Strategy and Finance said in its budget proposal for 2013 released today. The deficit will shrink to 4.8 trillion won, or 0.3 percent of gross domestic product in 2013, down from 14.3 trillion won, or 1.1 percent this year, according to its calculations.

“We need to secure fiscal room to respond preemptively to long-term challenges,” Vice Finance Minister Kim Dong Yeon said in remarks embargoed for today’s budget-statement release. “The budget draft aims to improve fiscal health as the South Korean economy is very much vulnerable to changes in global economic conditions.”

President Lee Myung Bak’s plan calls for the smallest deficit since the budget swung to a shortfall in 2008, the year Lehman Brothers Holdings Inc.’s collapse sparked a global crisis. Meeting the target will depend on how Asia’s fourth-largest economy recovers as European turmoil and slowing growth cut demand for exports that fell 6.2 percent from a year earlier in August.

Fiscal Balance

“The government’s plan to achieve fiscal balance next year or the year after may be delayed as tax collection slows with waning growth,” said Kang Joong Koo, an economist at the LG Economic Research Institute. “Balancing the budget should be a medium-term goal but it’s questionable whether that should be rushed when the economy needs more fiscal support.”

The finance ministry announced 5.9 trillion won of spending and tax relief this month, adding to 8.5 trillion won of support measures in June. Standard & Poor’s, Fitch Ratings and Moody’s Investors Service all cited South Korea’s strong position to weather shocks when they upgraded the country during a three-week period starting last month.

The won advanced 0.2 percent to 1,118.15 per dollar at 11:15 a.m. in Seoul, according to data compiled by Bloomberg. The benchmark Kospi index fell 0.3 percent.

South Korea’s government plans to sell 79.9 trillion won of bonds in 2013, compared with 79.8 trillion won this year, according to a financial ministry official who declined to be identified as the official report is yet to be released. Of the total, 57.5 trillion won will be used for buybacks and redemption payments.

December Elections

The finance ministry will present the budget draft to lawmakers by Oct. 2 for parliamentary approval. The ruling New Frontier Party is seeking to hold onto the presidency in December elections, with Lee’s single five-year term ending in February.

Spending on welfare will rise 4.8 percent to a record 97.1 trillion won. Education spending will increase 7.9 percent to 49.1 trillion won.

South Korea expects to collect 37.4 trillion won of revenue next year outside of tax collection from asset sales, including selling stakes in the Industrial Bank of Korea, Korea Development Bank and Incheon International Airport Corp.

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