Budget front-loading adds to concerns on H2 private spending

By Yi Whan-woo

The government’s strategy of front-loading the 2024 budget in the first half of the year is raising concerns that it may not assist in boosting sluggish domestic demand in the latter half.

According to the Ministry of Economy and Finance, it used up 357.5 trillion won ($258.85 billion) or 63.6 percent of the 561.8 trillion won allocated for projects requiring rapid execution.

The projects largely included the ones aimed at bolstering private spending, a twin engine of Korea’s economic growth along with exports.

Despite the government’s efforts, private spending retreated 0.2 percent quarter-on-quarter in the April-June period and was held accountable for the overall retraction of the country’s gross domestic product (GDP).

GDP shrank 0.2 percent over the cited period, marking the first retraction in 18 months after it beat expectations and ticked up 1.3 percent in the January-March period.

“Under the circumstances, whether the government can be successful in its push to revitalize domestic demand in the second half is uncertain, especially considering it has less than 50 percent of the relevant budget remaining,” Hanyang University economics professor Ha Joon-kyung said.

Nah Won-jun, an economics professor at Kyungpook National University, voiced a similar view.

“The government’s budget spending appears to be centering on boosting the economy as much as possible in the first half,” he said. “In that regard, it’s doubtful whether it has sufficient cash to spur domestic demand after using up more than half of the available budget.”

Under its belt-tightening policy to improve fiscal health, it is unlikely for the government to draw up a supplementary budget.

According to the finance ministry, the managed fiscal balance, a key gauge of fiscal health calculated on a stricter term, posted a deficit of 74.4 trillion won from January to May.

The deficit was larger than the shortfall of 52.5 trillion won in 2023, and also marked the largest figure ever for any cited period.

The national debt reached 1,146.8 trillion won as of end of May, up 17.9 trillion won from a month earlier and reaching the highest level for any given period.

The government accordingly faces worries that its shortfall in tax revenue may reach 10 trillion won this year, after suffering a record 56.4 trillion won shortage in tax income in 2023.

Nah urged the government to work closely with the central bank to “come up with an optimal mix of fiscal and monetary policies concerning domestic demand.”

With regard to monetary policy, persistent inflation is still regarded as a reason for weakened private spending, although it eased to an 11-month low of 2.4 percent in June and is approaching the Bank of Korea’s (BOK) 2024 target of 2 percent.

Such inflation means the BOK will be prudent in monitoring the benchmark interest rate while the rate remains high and places financial pressure on households.

The rate has stood at 3.5 percent since January 2023 — the highest level since December 2008.