South Korea has opted to maintain an expansionary fiscal policy stance for 2016 as the country seeks to prop up its economy struggling with sagging exports and anemic consumption, observers said Tuesday.

The government's 2016 budget proposal calls for a 3 percent on-year rise with spending hitting 386.7 trillion won ($324.6 billion), compared with 375.4 trillion won in 2015.

The increase comes despite a government projection that a drop in tax revenue and demand for more outlays will push up state debt to 40.1 percent of gross domestic product in the new year from a 38.5 percent estimate for this year.

"The decision to spend more than what the government will bring in is designed to keep the economy moving forward," said Finance Minister Choi-Kyung-hwan of the budget. "The rise in national debt should be seen as an unavoidable process to bolster the economy at this critical juncture."

The finance ministry has predicted Asia's fourth-largest economy is expected to grow 3.3 percent in 2016 from this year, down from a 3.5 percent projection made in June.

The 2016 growth outlook is slightly better than the government's target of 3.1 percent for this year as the economy has been losing momentum due to a drop in exports, and weak domestic spending and investment.

Outbound shipments, a key growth engine, plunged 6.1 percent on-year in the January-August period mainly due to less demand from China and emerging economies.

Domestic demand has also remained in the doldrums, though the government estimates it is showing budding signs of recovery following a virtual end to the Middle East Respiratory Syndrome that claimed 36 lives.

The focus of the 2016 budget has been placed on creating more jobs, especially for young South Koreans, and bolstering the country's growth momentum by overhauling the economy's structure.

High youth unemployment has plagued South Korea with the jobless rate for those aged 15-29 standing at 9.4 percent in July, much higher than the 3.7 percent average for the entire country.

In particular, Seoul has earmarked 15.8 trillion won for job creation, up 12.8 percent from this year, with its overall spending in the welfare, health and labor areas rising 6.2 percent to 122.9 trillion won.

In addition to creating more jobs, the government aims to push up defense spending by 4 percent on-year to 39 trillion won to beef up defense along the demilitarized zone, and build up South Korea's capabilities in anti-submarine warfare and land mines.

The emphasis on defense comes after the two Koreas placed their forces on high alert last month after land-mine blasts in the DMZ maimed two South Korean soldiers.

Beyond job creation and military spending, more will done to strengthen the country's ability to cope with disasters and disease control, that has taken on importance after the outbreak.

The government's expansionary fiscal stance has sparked concerns that the country's fiscal deficit will widen next year unless increased spending leads to higher economic growth.

The practice of "overstating" economic growth has played a part in fueling the fiscal deficit and national debt because tax earnings are directly linked to growth. Weaker-than-expected growth this year compelled the government to ask parliament for an extra budget.

In order not to inflate GDP growth, the finance ministry said it is the country's nominal GDP to advance just 4.2 percent in 2016, with tax revenue rising a modest 2.4 percent on-year to 391.5 trillion won.

"The nominal GDP and earnings numbers are very low compared to the past, and reflect the government determination not to suffer from tax shortfalls," a government official said.

In addition to taking a conservative outlook on growth, the government said it will slash projects getting state subsidies by 10 percent, and merge or ax some 300 projects that got state funding support in the past. Such moves can save upwards to 2 trillion won in taxpayers' money.

Despite such measures, the government said that the size of the fiscal deficit will worsen in the new year to 2.3 percent of the GDP from 2.1 percent this year.

Government officials and independent analysts said success or failure of the government's latest spending plan will depend on whether or not it can push up the country's growth potential.

If the expansionary policy drive fuels growth, it can lead to more tax revenues down the line that can naturally lead to less debt and rectify the fiscal imbalance.

Should the country fail to achieve the desired growth rate, increasing spending may help the economy in the short run, but lead to a spike in debt and fiscal imbalance, they said.

"The government is fully aware that debt and the fiscal deficit must be maintained at a certain level, or it can get out of hand," said a finance ministry official, who declined to be identified.

Park Chang-gyun, a business professor at Chung-Ang University, said it is critical for the expansionary budget stance to generate growth.

"Growth can resolve the fiscal health issue in one stroke, but if the country becomes locked into a low growth pattern, things can become dangerous," he said.

Others such as Lee Young, who teaches economics at Hanyang University, said he understands the government's dilemma in setting up next year's budget.

"In light of problems facing China and the rest of the world, the government probably had no choice but to push for an expansionary budget, even despite ensuing risks," Lee said. (Yonhap)