South Korea scales back key fiscal pledges as reality bites

By Se Young Lee

SEOUL (Reuters) – South Korea’s President Park Geun-hye apologised to voters on Thursday after backtracking on welfare promises in her first budget, battling what she said were extraordinarily difficult conditions.

“I am regretful that not all the elders who have given me their trust will receive the benefits,” Park said at a cabinet meeting. “But this doesn’t mean that the pledge has been abandoned.”

A monthly subsidy programme that she initially said would cover all Koreans aged 65 or older will now exclude those in the top 30 percent in terms of income.

Park also backed away from a pledge to balance the budget within her five-year term. Her government will now seek to trim the fiscal deficit to 0.4 percent of gross domestic product (GDP) by 2017, about a quarter of 2014′s projected shortfall.

A plan to pay half of college students’ tuition fees was pushed back to 2015.

This year’s tax revenue is projected to fall 7 trillion to 8 trillion won short of initial calculations, forcing the government to take on more debt to support the ailing economy.

The finance ministry says fiscal spending next year will rise by just 2.5 percent in annual terms to 357.7 trillion won ($333.6 billion), a far lower rise than this year’s 7.2 percent increase after accounting for a stimulus package passed in May.

Lawmakers from the opposition Democratic Party criticised the 2014 spending proposal, calling it too small to adequately counter the difficult economic environment.

TOO OPTIMISTIC?

Some analysts were sceptical about the administration’s plans, calling its projections of economic growth — 3.9 percent next year — and revenue overly optimistic.

SK Securities analyst Yum Sang-hoon said the government could be forced to draft another supplementary budget.

HSBC economist Ronald Man said: “If growth fails to pick up as strongly as the government expects, then funding pressures may increase. In such a case, we would expect the administration to scale back more of President Park’s campaign pledges, rather than take on more debt.”

The review process in parliament is also likely to be difficult. Democratic Party lawmakers on parliament’s budget committee criticised Thursday’s budget proposal, arguing that it will not do enough to meet the increasing social welfare needs of the rapidly-ageing population, or to boost growth.

The legislators called on the government to raise taxes on the wealthy to fund a boost to domestic demand, creating more jobs and expanding welfare.

But the Park administration has so far resisted calls for tax hikes, arguing that such increases would be counterproductive and further undercut economic momentum.

“The budget proposal for next year reflects strong determination from this government to revitalise the economy in the short term while ensuring fiscal soundness in the medium term,” Park said at the cabinet meeting.

Parliament is already in gridlock as the ruling Saenuri Party and the Democratic Party clash over issues such as reformation of the country’s intelligence agency.

The two parties have yet to agree on the schedule for reviewing the budget. They finally managed to pass this year’s spending bill in the early morning of New Year’s Day.

As economic weakness persists, data on Thursday showed consumer confidence is waning.

The Bank of Korea’s composite consumer index slipped to a five-month low of 102 in September. Though the reading indicates Koreans are still slightly more optimistic than pessimistic about their prospects, it still reflects some caution.

“Given fiscal spending is set to grow at a slower rate next year, this suggests that monetary policy will need to stay accommodative while the negative output gap persists,” said HSBC’s Man.

($1 = 1,072.3000 Korean won)

(Editing by Eric Meijer)

South Korea scales back key fiscal pledges as reality bites