South Korean President Moon Jae-in speaks during a Cabinet meeting at the presidential Blue House in Seoul, South Korea, Thursday, Aug. 29, 2019. Moon has berated Japan for carrying out its plan to downgrade South Korea's trade status and reiterated Seoul's stance that Tokyo was weaponizing trade to retaliate over political rows stemming from the countries' wartime history. (Han Sang-kyun/Yonhap via AP)
Reviving economic growth is crucial for the Moon Jae-in administration ahead of next year’s legislative election © AP

South Korea has drafted its most expansionary budget since the 2008/9 global financial crisis as its export-driven economy battles the growing global slowdown and a dispute with Japan. 

The finance ministry on Thursday proposed spending a record Won513.5tn ($424bn) in 2020, up 8 per cent from this year even when including a recently approved Won5.83tn supplementary budget to prop up the slowing economy. 

The bulk of the proposed 2020 budget would be spent on creating jobs, expanding welfare and developing areas the country has identified as new growth drivers as Asia’s fourth-largest economy grapples with the Sino-US trade war and a diplomatic spat with neighbouring Japan. 

Exports, which account for about half of South Korea’s gross domestic product, have declined for eight successive months amid cooling global demand and lower prices for the country’s biggest export item, memory chips. 

In addition to headwinds from the intensifying trade war between the US and China, South Korea has been hit by export controls from Japan on materials for its high-tech industries because of a spat over wartime forced labour. Japan has also removed South Korea from its “white list” of nations with preferential trade status.

“Downside risks have increased . . . It would be helpful for fiscal policy to play a more active role to put the economy back on a growth tack,” finance minister Hong Nam-ki told a news conference. 

Mr Hong said it would be hard to achieve the government’s 2.4-2.5 per cent growth target for this year, given the deteriorating economic circumstances. South Korea’s economy posted its biggest contraction in a decade in the first three months of this year although it recovered in the second quarter on heavy government spending. 

To counter the fallout of the dispute with Japan, the proposed budget will include a 17.3 per cent increase in expenditure on research and development to help South Korea develop its key materials and parts industries as well as to invest in future growth engines such as artificial intelligence, 5G networks and bio-health services. 

Reviving economic growth is crucial for the administration of President Moon Jae-in ahead of next year’s legislative election. The government also proposed increasing spending on job creation and welfare by 21.3 per cent and 13 per cent respectively next year. 

The Bank of Korea last month cut interest rates for the first time in three years to 1.5 per cent and is expected to deliver another rate cut in October. 

The government also plans to issue a record Won60.2tn of treasury bonds next year to fund the growing fiscal deficit. 

The budget plan is subject to parliamentary approval. 

Although Mr Hong stressed the country’s fiscal status remained healthy, analysts cautioned that the fiscal deficit could balloon in the coming decades. 

The economic slowdown looked like it could last for some time, which would force to government to continue to increase spending and lead to a sharp increase in public debt, said Lee Geun-tae, a researcher at LG Economic Research Institute.

“There is a limit to boosting the economy with public spending alone,” he said.

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