(News Focus) Extra budget likely to slow downturn but hurt fiscal soundness

SEOUL, March 24 (Yonhap) -- The large-scale extra budget that the government
unveiled on Tuesday is expected to blunt the sharpening economic downturn to some
extent by helping create jobs and revive anemic domestic demand.
It still remains to be seen whether the measure can prevent the economy from
slipping into what would be the first recession in more than a decade at a time
when global trading conditions are getting worse, analysts said.
They are also raising concerns that the huge budget spending could undermine the
nation's fiscal soundness by increasing government debt since most of the funding
should be done through Treasury sales.
Earlier in the day, the government held a Cabinet meeting and endorsed a
28.9-trillion won extra budget, equivalent to 3 percent of the nation's gross
domestic product (GDP).
This is the largest ever since 1998 when the nation drew up a 13.9 trillion won
supplementary budget in the wake of the Asia-wide financial meltdown, according
to the Ministry of Strategy and Finance.
Under the extra budget package, the government will inject about 3.5 trillion won
in generating jobs and helping companies retain workers through pay cuts. Public
works and diverse job training will also be provided.
Around 4.2 trillion won will be given to low-income people mainly in the forms of
cash, consumption coupons and loans. To help cash-strapped small companies and
exporters, the government will spend 4.5 trillion won, with 3 trillion won
earmarked to bolster provincial economies.
"Job creation is the best welfare policy and the most fundamental measure that
underpins our efforts to get over the economic crisis," Finance Minister Yoon
Jeung-hyun told in a press conference.
"Jobs will give stable income sources to households, which will help revive the
sluggish domestic demand. This is what we prioritized in drawing up the extra
budget," he added.
Yoon expects that the spending plans coupled with de-regulation and more
private-sector investment will result in a 2-percentage point hike in GDP and
create about 550,000 new jobs. Earlier, he forecast that the economy contract 2
percent and around 200,000 works will be lost this year.
The extra budget, to be funded mostly by debt sale, is the latest in a string of
economic stimulus measures that the government has unveiled to counter an
accelerating economic downturn.
Since June of last year, the government has rolled out 50 trillion won worth of
tax cuts, and fiscal spending including the latest extra budget.
Market watchers welcome the extra budget plan, saying that it is a "right" option
at a time when global efforts are intensifying to increase fiscal spending aimed
at averting the worst economic recession in decades.
"This is sending a strong signal to the market that the government is doing its
utmost to get the economy back on track," said Ko Yoo-seon, an analyst at Daewoo
Securities. "Still, it is just a time-buying measure to blunt a sharpening
economic downturn."
Overseas trading conditions are getting worse, working against the export-driven
South Korean economy. Exports plunged 17.1 percent in February from a year
earlier, after posting a 33.8 percent decline in the previous month.
The outlook is no better. The International Monetary Fund said in its latest
report that the world economy could contract up to 1 percent this year,
downgrading its earlier projection of a 0.5 percent advance. This would mark the
first negative growth for the world economy in 60 years.
"The global economic downturn is taking place at a faster pace than has been
expected in terms of its depth and breadth," Finance Minister Yoon said.
"Reflecting changed economic conditions at home and abroad, the government
decided to draw up this extra budget to overcome the current crisis as quickly as
possible."
Critics say that the budget plan is the "way to go" under the current economic
crisis but express concerns that it could worsen the nation's fiscal soundness.
Another concern is whether the funding can be possible as the debt market will be
flooded by massive government bonds amid a protracted economic slowdown.
To fund the supplementary budget, the ministry said that it will issue 22
trillion won worth of Treasuries, with the rest coming from extra funds and
unused tax revenues left over from last year. This is in addition to the
government's initial plan to sell 74 trillion won worth of state debts this year.
With the extra budget, the government debt will account for 38.5 percent of GDP,
up from earlier 34.1 percent. The ministry said that the debt-to-GDP ratio
remains low still compared with the average 75.4 percent for OECD member nations.
"We believe that the market has enough liquidity to absorb state debt and have no
plan to ask for the central bank to purchase Treasuries," said Yoo Sung-kull,
deputy finance minister for budget office.
kokobj@yna.co.kr
(END)