South Korea 2017 budget focuses on job creation, spending up modestly

By Christine Kim

SEOUL (Reuters) - South Korea will focus on creating more jobs and increase spending modestly next year, while seeking out new sources of economic growth, the finance ministry said on Tuesday as it unveiled its draft 2017 budget.

Budgeted spending will increase 3.7 percent to 400.7 trillion won ($358.54 billion) next year, picking up from 2.9 percent growth set for this year but slower than the 5.5 percent rise set for 2015, the finance ministry said.

Spending for health, welfare and labor will account for the biggest slice of the pie at 130.0 trillion won, up 5.3 percent from this year.

Some 17.5 trillion won of that will be used solely for job creation, although the government did not give a specific target number for new jobs.

"We plan for government spending to carry out an aggressive role for the economy to hold its balance in a turbulent time," said Finance Minister Yoo Il-ho in a news conference announcing the budget.

"Next year's budget is as expansionary as it can be and focuses on job creation and recovering economic activity."

Government projects that have proved ineffective in creating jobs will be scrapped or downsized, while industries that young Koreans prefer working in, such as gaming and technology, will receive more government investment next year.

The budget assumed the economy will grow by a real 3.0 percent next year, versus a projected 2.8 percent expansion for this year and last year's actual 2.6 percent growth.

The plans were not a surprise, said analysts.

"It might look good for the government's balance sheet but I don't think it will end up as a huge plus for the economy," said Park Seok-gil, an economist at JP Morgan.

Asia's fourth-largest economy grew at an unexpectedly robust 3.2 percent annual rate in the second quarter, driven by firmer domestic consumption and capital investment, but analysts said the lift would probably be temporary.

Exports remain weak amid sluggish global demand, while an ongoing overhaul of the country's shipping and shipbuilding industries may see tens of thousands of jobs lost.

FISCAL PRUDENCE

In its medium-term fiscal management plans for 2016 to 2020, the ministry said government spending would grow by an average 3.5 percent each year.

South Korea is expected to have a fiscal deficit of 1.7 percent of annual gross domestic product (GDP) next year, improving from 2.3 percent expected this year. The government plans on reducing that to 1.0 percent by 2020.

Sovereign debt will stand at 40.4 percent of GDP next year, compared with 40.1 percent set for this year.

On a medium-term basis, the government aims to keep this number as close to 40 percent as possible to maintain a healthy balance sheet.

"This year we took fiscal prudence a bit more into consideration than last year, as last year government money was spent aggressively on many economic hardships including a sizable extra budget," said Song Eon-seok, a vice finance minister.

Once parliament passes this year's extra budget, South Korea's fiscal deficit and sovereign debt-to-GDP will stand at 2.4 percent and 39.3 percent this year, respectively.

The extra budget had been expected to be passed on Tuesday, but may be delayed as ruling and opposition lawmakers are at odds over spending details, a senior finance ministry official told Reuters.

The government plans to submit next year's budget bill to parliament for approval by Sept. 2. South Korea's fiscal year starts on Jan. 1.

Separately, finance ministry officials told Reuters the government plans to sell up to a net 37.7 trillion worth of treasury bonds in 2017, compared with 45.9 trillion won worth planned for 2016.

The government also raised the limit for possible foreign currency-denominated foreign exchange stabilization bonds to $1 billion next year, up from $500 million for this year.

(Reporting by Christine Kim; Additional reporting by Shinhyung Lee and Cynthia Kim; Editing by Kim Coghill)

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