South Korea has announced plans to reduce annual government spending for the first time in 13 years in order to reduce pandemic-era stimulus and assist the central bank in containing inflationary pressures.
The finance ministry announced the first budget proposal under right-wing President Yoon Suk-yeol on Tuesday, estimating that government spending in 2023 will be 639 trillion won ($473 billion).
That is 6% less than this year’s spending after two supplementary budgets, and would be the first annual decrease in spending since 2010, assuming no additional budgets are passed in 2023.
Excluding extra budgets, South Korean spending will increase by 5.2 percent in 2023, the slowest rate since 2017.
The move represents a departure from the aggressive fiscal spending implemented by Moon Jae-left-wing in’s government in recent years, as well as the massive stimulus measures implemented during the pandemic to help the economy weather the COVID-19 crisis.
Since August of last year, the Bank of Korea, which has been at the forefront of a global tightening cycle, has raised interest rates by a total of two percentage points.
Governments from Australia to Canada, on the other hand, have maintained expansionary fiscal policies even as their central banks raised interest rates to combat rising inflation.
“The government is shifting its fiscal policy stance completely to ‘sound financing’ to secure fiscal sustainability, improve external credit standing and spend responsibly for future generations,” the South Korean finance ministry said in a statement.
To achieve the 2023 spending cut, the government said it would “transfer some public projects to the private sector” and would cut the wages of senior officials at the highest levels of government, according to the budget.
The government intends to cut public infrastructure spending by 10.2 percent next year, while subsidies and other spending for small and medium-sized businesses will be cut by 18 percent.
However, the budget anticipates an increase in social welfare expenditures for low-income earners and the vulnerable, with demand for welfare spending only expected to rise in an aging economy.
Last year, South Korea’s birth rate fell to a new low of 0.81 children per woman. Defense spending will rise 2.5 percent to 57.1 trillion won as the country seeks to modernize military equipment in response to potential North Korean threats.
The fiscal deficit in South Korea will be 2.6 percent of GDP next year, down from an estimated 5.1 percent this year due to extra spending, according to the finance ministry. According to the ministry, the debt-to-GDP ratio will fall to 49.8 percent from 50.0 percent for the first time in five years.
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