Budget spending focused on investment in new growth engines


The Ministry of Strategy and Finance on Thursday unveiled its policy to improve the nation’s fiscal soundness next year by slashing unnecessary expenditure.

The government is aiming to minimize the 2012 fiscal deficit by curbing the growth of total expenditure, ministry officials said citing its report to the Cabinet meeting held earlier in the day.

According to the Finance Ministry, the country is projected to post a deficit equal to 2 percent of gross domestic product in 2011, down from 2.7 percent in 2010 and 4.1 percent in 2009.

Its budget spending is focused on investment in new growth engines based on higher value-added industries.

The ministry also plans to further invest in the controversial Four Major Rivers Restoration Project pushed by the Lee Myung-bak administration.

“For this year, the nation’s fiscal deficit was estimated at around 15-20 trillion won for the year, equivalent to about 2 percent of GDP,” a ministry official said.

The deficit to GDP ratio stayed at 1 percent in 2005 and 1.3 percent in 2006. In 2007 the country posted a fiscal surplus.

As the deficit is larger than in previous years, the ministry recently launched a task force to manage and review its deficit reduction plans.

The task force is composed of key government ministers and a group of financial experts.

“It is designed to control public expenditures and focus on efficiency in allocation,” a ministry official said.

The government-civilian committee was first suggested by the Finance Ministry a year ago.

It includes ministers from education and science, defense, public administration, food and agriculture, health, labor and employment, and transportation ministries as well as the Ministry of Knowledge Economy.

Private think tanks say that long-term fiscal issues such as the low birth rate and an aging population, both of which can threaten fiscal soundness, should be taken into serious consideration.

“Increase in pension and medical costs associated with the increase in the aging population will put more fiscal pressure on the government,” the Samsung Economic Research Institute has said.

In a report, SERI emphasized that the government should learn from Greece, and overhaul its fiscal policies, including cutting spending.

“The crisis in southern Europe is stressing the importance of fiscal soundness,” it said.

The government is targeting a balance in 2014, and it should make sure that the aim is achieved, the report added.

Hyundai Economic Research Institute advised the government to consider various measures to increase tax sources, which include introducing a green tax or raising taxes on cigarettes. It also advised the government to consider privatizing state run businesses.

“When considering the deficit that grew while overcoming the economic crisis and the possible risks following the general aging of society, it is crucial to restore fiscal soundness as soon as possible,” the Korea Institute of Public Finance said.

By Kim Yon-se (kys@heraldcorp.com)