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Official spending drives growth

Economy increasingly dependent on support from the government
Nov 16,2018
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Reliance on government spending for economic growth and job creation has increased over the years, according to recent reports by the government and lawmakers.

In its “2018 Fiscal Policy Report”, the Finance Ministry said that the government’s contribution last year to GDP growth was 0.8 percentage points, up from a 0.0 percentage point contribution in 2011.

The 2017 figure indicates that government spending accounted for more than a quarter of the total GDP growth rate of 3.1 percent that year. Government consumption contributed 0.5 percentage points to GDP growth, while investment in areas such as construction and facilities accounted for 0.2 percentage points.

The Finance Ministry said it expects this year’s contribution from government expenditure to remain similar or higher than last year’s, hinting at an even greater reliance on government spending.

Moody’s recently forecasted this year’s economic growth rate at 2.5 percent.

Total government expenditure increased 7.1 percent this year, the highest since the fallout of the global financial crisis in 2009.

Job creation has also become dependent on the government. According to audit reports by Liberty Korea Party lawmaker Choo Kyung-ho, out of the monthly average of 100,382 newly recruited workers through September, the public sector employed 62,501 workers, or 62 percent, of the total.

“To increase high-quality jobs, the private sector needs to come alive, but we aren’t seeing such signs,” said Choo. “We need to change the policy direction to revive the private sector, but we are currently under government-led or tax-led growth that requires spending.”

Fiscal spending has been most prominent during tough economic times. In 2009, after the global financial crisis, the government’s contribution to GDP growth hit an all-time-high of 2.1 percentage points. In 2016, when the country was hit by the MERS epidemic and Thaad deployment retaliation by China, government spending accounted for 0.9 percentage points of economic growth.

Despite the total 54 trillion won ($47.86 billion) spent on job creation over the past two years, the unemployment rate this October hit 3.5 percent, the same figure as in October 2005.

“While it is correct to increase fiscal spending when the economic situation is difficult, we are currently spending taxes to make up for problematic policies such as the minimum wage hike and the reduction of weekly working hours,” said Kim Tae-gi, an economics professor at Dankook University.

“I am worried that the vicious cycle of new fiscal spending making up for inefficient fiscal policies suppressing the private sector may worsen,” added Kim.

There are even concerns about “fiscal spending addiction.”

Instead of solving the economic problems by encouraging private sector investment and increasing consumption, the country could begin to rely on spending.

This phenomenon is noticeable in the increase in the government’s mandatory expenditures.

Government expenditure is categorized as mandatory or discretionary, whereby the former covers legally-mandated areas such as healthcare and the latter is adjustable based on government policy.

This year marks the first time that mandatory spending - 217 trillion won - has ever been greater than discretionary spending - 212 trillion won. Mandatory spending will likely increase in the future, according to the Finance Ministry.

“If welfare expenditure, which is difficult to cut when increased, continues to grow, it will put a burden on the government’s fiscal health,” cautioned Koo Chung-mo, professor emeritus of economics at Kangwon National University. “It would be fine during periods of high tax collection, but if taxes decrease due to the worsening economy in the future, fiscal spending could come back like a boomerang.”


BY SOHN HAE-YONG [chae.yunhwan@joongang.co.kr]