Published : 2013-10-11 20:14
Updated : 2013-10-11 20:14
On Thursday, the Bank of Korea cut its 2014 growth outlook, from 4 percent to 3.8 percent. The central bank also said it expected the Korean economy to grow 2.8 percent this year, as it forecast in July.
The central bank was not alone in coming up with a dimmer outlook. Earlier in the week, the International Monetary Fund lowered its 2014 growth estimate for Korea from 3.9 percent to 3.7 percent. Other international agencies and investment banks had even lower estimates, mostly ranging from 3.2 percent to 3.5 percent.
These gloomy prospects are unwelcome news to President Park Geun-hye’s administration, which is putting the final touches to its 2014 budget request based on the assumption that growth will be at 3.9 percent in real terms next year. Slower growth means lower tax revenues.
Assuming consumer prices gain 2.7 percent next year, the Park administration expects the nominal growth rate to reach 6.5 percent. One percentage point cut in the nominal growth rate translates into a 2 trillion won shortage in tax revenues.
As such, it is being forced to seriously consider a spending cut. An equally painful alternative will be to draw up a supplementary budget bill and issue treasury bonds to make up for a growing fiscal deficit. This will add to the 515 trillion won national debt.
At a time when an economic turnaround is not assured, the Park administration is committed to launching costly welfare programs. If no action is taken to curb spending and increase revenues, however, borrowing will get out of control. According to one estimate, the national debt will grow by as much as 111.8 trillion won during the five years of Park’s governance.
What the administration needs to do under these circumstances is to keep the economy from falling into a low growth trap and boost investments by foreign business concerns as well as Korean corporations. According to one estimate, foreign direct investments in Korea amounted to $10.3 billion last year while Korean companies invested $23 billion.
When the right incentives are given, the yawning gap between outbound and inbound investments can be reduced. For instance, both Korean and foreign corporations will increase their investments in the nation if they are permitted to establish for-profit educational institutions and hospitals. The administration will have to put corporate investments before anything else and push for deregulation if it wishes to put growth back on track.