SEOUL (Reuters) - President Park Geun-hye's administration bowed to hard economic reality on Thursday, retreating from a pledge to balance the budget within its five-year term and scaling back major social welfare spending plans.
The government now aims to reduce the fiscal deficit to 0.4 percent of annual gross domestic product (GDP) in 2017, President Park's last full year in office, from 1.8 percent projected for 2014 -- acknowledging its fiscal limits as this year's tax revenue is projected to fall 7 trillion to 8 trillion won short of initial calculations.
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), far lower than this year's 7.2 percent rise including a stimulus package passed in May. Even so, next year's fiscal deficit level will remain unchanged from 2013 relative to GDP, while its total net debt will rise.
Part of the problem is that a firm economic recovery has yet to materialize. Weaker-than-anticipated growth in 2012 and 2013 have undercut the government's revenue projections and has forced it to take on more debt this year to support the economy.
Recognizing these spending constraints, the government will introduce scaled-down versions of the major social welfare spending plans it pledged during last year's elections.
A monthly subsidy program that Park initially said would cover all Koreans aged 65 or older will now exclude those in the top 30 percent in terms of income, while the government is pushing back its pledge to support half of college tuition for students by one year to 2015.
"The budget was focused on reinvigorating the economy because the recovery must take place in order to meet our fiscal needs," Finance Minister Hyun Oh-seok told reporters at an embargoed briefing. "Once that recovery takes place and we can acquire the necessary tax revenue, it will be possible to create the conditions under which the pledges can be fulfilled."
The government also aims to keep average annual expenditure growth between 2013 and 2017 at 3.5 percent compared with projections of an average revenue growth of 5 percent, underscoring the challenges the Park administration will face in meeting growing social welfare spending needs for a rapidly ageing population while reducing the deficit.
To be sure, South Korea's fiscal position remains strong compared with other economies of its size, and analysts do not expect any major financing issues in the near term. South Korea's total government debt stood at 34.8 percent of GDP in 2012, well below the Organization for Economic Co-operation and Development average of 108.8 percent.
But major questions remain about the Park administration's ability to fund its various pledges, estimated to cost 135 trillion won between 2013 and 2017. Some opposition Democratic Party legislators campaign vocally about the need to raise taxes on the wealthy and major conglomerates to support the working class, but the administration says such a move would further undermine growth.
"Raising taxes would be undesirable at a time when the government has resorted to running a deficit to boost the economy," Hyun told reporters at Tuesday's briefing, adding that the government will focus on maximizing resources by reducing tax exemptions and cracking down on underground economic activity to boost its tax base.
The spending proposal will be submitted to parliament in October for review. But increasing acrimony between the Park administration and the opposition Democratic Party over wealth redistribution and other political conflicts will likely pose further challenges to its ratification.
($1 = 1072.3000 Korean won)
(Reporting by Se Young Lee; Editing by Eric Meijer)
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