Focus on fiscal health
2023 budget plan calls for belt-tightening
The Yoon Suk-yeol administration’s 2023 budget plan marks a shift to fiscal austerity from the previous government’s fiscal expansion. This change is a step in the right direction as the country has shifted into an austerity mode to deal with runaway inflation, a weakening local currency against the US dollar and rising interest rates. ‘interest.
On Tuesday, the Yoon government approved a budget of 639 trillion won ($473.5 billion) for next year. The proposed amount is up 5.2% from this year’s budget of 607.7 trillion won, the lowest growth rate since annual spending rose 3.7% in 2017. However, the sum represents a 6% drop from this year’s total spending of 679.5 trillion won. included two sets of supplementary budgets.
This is the first time since 2010 that the government has decided to reduce total spending. Under the new budget bill, the Yoon administration plans to cut non-essential spending by a record 24 trillion won in 2023. The cut aims to restore fiscal soundness. The government is seeking to reduce the budget deficit to 58.2 trillion won next year from an estimated 110.8 trillion won this year.
If the reduction is carried out as planned, the budget deficit-to-GDP ratio will fall to 2.6% in 2023, from an estimated 5.1% for this year. The government is also trying to control the growth of the national debt which is expected to reach 1,134.8 trillion won next year from this year’s projected sum of 1,068 trillion won. The debt-to-GDP ratio is expected to climb to 49.8% from 49.7%, marking the weakest growth in four years.
As Finance Minister Choo Kyung-ho said, it’s time for fiscal austerity. The previous Moon administration had pushed for aggressive fiscal expansion to cushion the economic blow of the COVID-19 pandemic. The Bank of Korea (BOK) also cut its key rate to a record 0.5% at the height of the unprecedented public health crisis.
But now things have changed a lot with the US Federal Reserve conducting monetary tightening to keep inflation under control. The BOK has continued to raise its key rate since August 2021 to combat soaring inflation and boost the value of the won against the greenback. The Yoon government’s fiscal tightening is in line with the central bank’s monetary tightening. There is no doubt that a tight budget is necessary to regain fiscal and monetary stability.
The government plans to present its 2023 finance bill to the National Assembly soon. Lawmakers from both ruling and opposition parties are expected to deliberate closely on the bill and approve it before the legally binding deadline. Opposition parties should not try to increase the budget to include pork barrel projects.
The Yoon administration should be careful not to draw up additional budgets in an attempt to stimulate the economy or spend more on populist projects. However, there is a need to strengthen the social safety net to support those most vulnerable to fiscal austerity and monetary tightening. It is equally important to ensure that fiscal austerity does not lead to recession or stagflation. Policy makers must adopt a flexible attitude to avoid possible economic and financial misfortunes. They must also put in place elaborate policies to overcome the country’s structural economic weakness and maintain the growth momentum.