South Korea announces £9.2bn stimulus package

16 Apr 13
South Korea has announced a multibillion pound spending plan to stimulate its economy and make up for shortfalls in tax revenues cause by a slowdown in growth.

The KRW17.3 trillion (£9.2bn) supplementary budget package, published by the country’s Ministry of strategy and finance today, boosts spending on job creation and the housing market. It also includes support for local government to make up for revenues they are losing out on from the extension of a cut in the levy paid on consumer purchases, the acquisition tax.

It is the country’s largest stimulus package since it was hit by the Asian financial crisis in 1998.

Small- and medium-sized enterprises will receive KRW1.3trn (£800m) in support, with specific funds set aside for exporters.

The supplementary budget is proposed to help stimulate the economy, and finally pave a way to fiscal soundness,’ the finance ministry said in a statement announcing the plans.

The country’s economy has been hit by faltering export growth and relatively low levels of household and business consumption domestically. Last month, the finance ministry cut its forecast for economic growth in 2013 from 3% to 2.3% – a slight improvement on the below-trend 2% recorded in 2012.

The supplementary budget makes South Korea the latest Far East economy to increase government spending in a bid to boost growth, following Japan’s announcement of a $113bn stimulus plan in February.

Over two-thirds of the spending plan announced today – KRW12trn (£7bn) – will be used to finance revenue losses. 

‘Tax revenue losses of KRW6trn is forecast with economic growth outlook being revised down and non-tax revenues are expected to be less than originally planned by KRW6trn, due to a delay in sales of government holdings in the Korea Development Bank and the Industrial Bank of Korea,’ the ministry explained.

The money is principally being financed by raising additional government debt, although just under KRW1trn will be provided by a combination of spending cuts and drawing on both the government’s and Bank of Korea’s surpluses.

‘The government will minimise the issuance of government bonds by utilising the excess in funds, reducing operating costs of public institutions and streamlining national projects.  The government will also restructure inefficient fiscal spending systems and review tax breaks,’ the finance ministry said. 

Despite this, the package is expected to increase the country’s 2013 budget deficit from 0.3% of GDP to 1.8% and raise its debt-to-GDP ratio from 34.3% to 36.2%.

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