South Korea President Park Geun Hye was forced to scale back aid she pledged to pensioners in her 2014 budget and delayed plans to eliminate the deficit as the government forecast the first drop in revenue in four years.
In her first budget draft since taking office in February, Park boosted welfare spending to a record while scaling back a plan to expand pension benefits as dwindling revenue restricts her ability to increase support for an aging population. The deficit is forecast to remain at 1.8 percent of gross domestic product, a seventh straight year of shortfalls in Asia’s fourth biggest economy, the finance ministry said in its proposal.
“I feel sorry not all senior citizens will be paid,” Park said today, according to a statement released by the presidential house. “I will do my best to implement within my term my promises and things that I couldn’t implement as scheduled due to the currently difficult fiscal conditions.”
Park faces public pressure to fulfill election pledges to spend 135 trillion won ($126 billion) over five years to bolster social safety nets and defense as slower growth and steps to revive an anemic housing market sap revenue. While Standard & Poor’s this week cited South Korea’s “sound” fiscal position for affirming its long-term ratings at A+, the government won’t balance its books by 2017 as planned, according to the finance ministry.
Park aims to stoke a rebound after the economy grew 1.1 percent in the second quarter from the first quarter, the fastest in more than two years. The finance ministry forecast growth will accelerate to 3.9 percent in 2014 from 2.7 percent this year.
“While it would be correct to reduce spending for fiscal soundness as we’re experiencing difficulty raising taxes, it’s necessary to maintain fiscal spending at an appropriate level to cement a recovery,” Finance Minister Hyun Oh Seok said in a briefing in Sejong.
The Kospi index was roughly unchanged as of 11:28 a.m., while the won increased 0.2 percent to 1075.60 per dollar.
The government projects the fiscal deficit will narrow to 0.4 percent of GDP by 2017, dropping a goal from May to balance the books “by the end of the current administration,” finance ministry statements show. The president’s five-year term ends in February 2018.
“Park won’t be able to make all her promises come true and the revenue situation will show that in the next couple of years,” Kim Hyeon Wook, a Seoul-based economist at SK Research Institute and a former Bank of Korea economist, said before the release. “Her predecessors prioritized fiscal soundness more than Park, which is a concern as welfare demand will only grow.”
The government will exclude the wealthiest 30 percent of South Koreans over the age of 65 from a monthly cash allowance of up to 200,000 won promised to the whole age group by Park, saving about 200 billion won, according to the draft budget.
Park won the December vote on a platform of expanded social spending, including the allowance for the elderly, as well as offering free treatment for four major diseases including cancer and cardiac disorders.
Scaling back the pension pledge would be an “act of betrayal,” opposition leader Kim Han Gil said at a meeting with elderly people yesterday.
Park’s approval rate slid to 60.9 percent in a poll on Sept. 20 after she failed to convince the main opposition party to end its boycott of the current parliamentary session. Her approval rating had reached a high of 69.5 percent on Sept. 10, according to a survey by Seoul-based pollster Realmeter.
Expenditure will increase 4.6 percent to 357.7 trillion won while revenue, including income from a state-run pension fund and proceeds from the sale of government assets, will fall 0.5 percent to 370.7 trillion won. Excluding those other income sources, the budget will be in deficit.
South Korea has posted fiscal shortfalls since the budget swung into the red in 2008 during the global financial crisis. An original aim to balance books by 2014 was moved back to 2017 in May after the government introduced a 17.3 trillion won extra budget to boost growth, pushing the deficit to a record 46.2 trillion won in the first half of the year, according to the finance ministry.
Welfare spending will increase 8.7 percent to record 105.9 trillion won next year, accounting for 29.6 percent of expenditure. Infrastructure spending will fall 4.3 percent to 23.3 trillion won and is projected to shrink by an annualized rate of 5.7 percent until 2017.
The government aims to raise 26.7 trillion won next year by selling stakes in banks and through other means, according to the statement. A total of 97.9 trillion won in treasury bonds will be issued in 2014, an increase from 88.4 trillion won this year, finance ministry director Kim Jin Myung said by phone today, confirming an earlier Yonhap News report.
Government debt will rise to 515.2 trillion won next year, or 36.5 percent of GDP -- below an average of 108.8 percent for members of the Organization for Economic Co-operation and Development at the end of 2012.
The finance ministry will present the budget draft to lawmakers by Oct. 2 for parliament’s approval.