• The state budget proposal for 2024 plans the smallest increase in public outlays in 18 years. This signals a renewed emphasis on fiscal soundness. 

• The government will use its fiscal ammunition in a more targeted manner. Priority policy areas will include advancement in strategic technologies, support for small and medium-sized exporters and the encouragement of childbearing.

• The more restrained fiscal spending plan will weigh on domestic demand. Economic growth in 2024 will depend instead on economic momentum in key export markets and an anticipated loosening of monetary policy.

South Korea’s Ministry of Finance announced the state budget proposal for 2024 in late August. The government proposes a 2.8% increase in fiscal expenditure to W656.9trn (US$495bn). The modest proposal for budget expansion reflects a shift to fiscal consolidation. Details of the changes made to state fund allocations for various budget categories also reveal adjustments to the government’s policy priorities. However, the more restrained approach towards fiscal expenditure will constrain the economy’s momentum in 2024.

Gone are the years of fiscal profligacy 

The latest budget proposal marks the return of the country’s inclination towards fiscal prudence, as the conservative-led government seeks to rein in expenditure to restore fiscal health. The proposed increase in the state budget for 2024 was the smallest since 2006. Under the presidency of Yoon Suk-yeol, who was elected in 2022, the incumbent government sought to limit public expenditure in its budget for 2023 (when it grew by 5.1%), but the fiscal consolidation plan for that year had to be scaled down amid the lingering threat from the covid‑19 pandemic and the growing cost-of-living burden on low-income households.

The more restrained fiscal approach also reflects a change in governing philosophy, as the incumbent conservative administration prefers to limit the extent of state intervention in the private sector. Expansive fiscal policy in South Korea predated the pandemic period, when large-scale state subsidies and cash handouts were needed to cushion the blow of mass illness and restrictions on mobility and business operations. The previous government—under a liberal-leaning president, Moon Jae‑in—used fiscal expenditure as an instrument to shore up employment, public education and industrial development. As a result, annual budget growth averaged 8.7% during its five-year term between 2018 and 2022.

The government’s fiscal account has been in the red since 2019, before which a surplus had been recorded every year since 1983 (with the exception of 2009). By contrast, the current government has opted to move in a low-tax, light-regulation direction. It has brought down the top rate of corporate income from 25% to 24% from 2023, and plans to cut it further to 22%, with additional tax deductibles proposed to encourage business investment. The relatively small expenditure growth in the proposed budget for 2024 follows this low-tax, small-state approach.

Targeted support with an emphasis on fiscal soundness

Despite a renewed emphasis on fiscal prudence, the budget proposal for 2024 indicates policy areas where the government intends to step up support. Social provision, including healthcare, social welfare and employment, will be the budget category that enjoys the largest growth, with a 7.5% increase in allocated funding. Most of this increased expenditure will go to childcare support and subsidies. To combat South Korea’s deepening demographic challenges (the country’s fertility rate dropped to a world low of 0.7% in 2022), the government plans to use fiscal tools to encourage childbearing. These will include more generous monthly payments per child; an extension of paternal leave entitlement from 12 months to 18 months; and the availability of state-backed low-interest loans to new parents for housing purposes. 

Aware of the headwinds facing a slowing global economy, the government proposes to increase corporate support in 2024. The focus will be concentrated on the export sector, particularly for small and medium-sized enterprises. In addition to export financing support, the government will also provide guidance and subsidies for expansion into new markets in South-east Asia and the Middle East, as South Korean manufacturers speed up efforts to diversify their supply-chain networks outside China. In line with the increasing prominence of economic security, the budget for securing public reserves of fuel and critical resources for the battery industry will also record double-digit growth in 2024.

Research and development (R&D), education and the environment will slip down the government’s funding priority list. The treatment of R&D funding is particularly revealing about the government’s fiscal approach; a 15.6% decrease in proposed spending on R&D projects demonstrates the extent of the administration’s commitment to fiscal prudence, as it aims to avoid ineffective use of public resources. However, most of the allocated funding will go to strategic industries such as semiconductors, artificial intelligence and biotechnology, amounting to 6.3% growth in public expenditure in these areas. This highlights a more selective fiscal policy that emphasises cost-benefit analysis and the public sector’s role in guiding and supporting development in cutting-edge technologies that have the potential for wide application across the whole economy.

Mixed economic implications

A more restrained public spending plan for 2024 will help to curb inflation and slow growth in public debt, but will also undercut an anticipated economic rebound in that year. The more cautious public expenditure plan will translate into slower growth in government consumption and lower public capital expenditure, resulting in a smaller multiplier effect for the private sector. This will aid the efforts of the Bank of Korea (BOK, South Korea’s central bank) to prevent a rebound in consumer price inflation.

The planned fiscal consolidation, including the decision not to propose a supplementary budget this year, will nevertheless weigh on South Korea’s economic growth in 2024. Economic momentum is on a weakening trajectory against a backdrop of dwindling consumer demand in the US and China, South Korea’s two largest export markets. On the domestic front, consumer spending will remain under pressure from elevated borrowing costs in the remainder of this year, and business investment is unlikely to rebound until the export outlook improves. By shifting its focus to fiscal consolidation, the government is in effect passing on the task of boosting the economy to the central bank and the private sector. 

EIU expects that a recovery in global trade from mid-2024, particularly in demand for consumer electronics, will bolster South Korea’s export-oriented manufacturing sector, thus generating a positive effect on employment and wage growth. We also believe that receding inflationary pressure will allow the BOK to start to loosen its monetary policy in early 2024, before the Federal Reserve (the US central bank) embarks on its own easing cycle. The ensuing decline in borrowing costs will facilitate an improvement in consumer and business sentiment. However, the planned fiscal tightening will keep a lid on economic growth. Consequently, we forecast an increase in the downside risk to our real GDP growth forecast of 2.5% for 2024.

We expect the government to fail to deliver on its plan to narrow the fiscal deficit to the equivalent of 0.6% of GDP in 2023, from 3% of GDP in 2022. Slower growth in tax revenue, amid sluggish export performance, will outweigh the effects of smaller outlays on subsidies for low-income households and small businesses. Consequently, we forecast that the deficit will equate to 2.7% of GDP in 2023. Unlike the government’s pessimistic fiscal outlook for 2024, which envisages the deficit widening to 1.9% of GDP, we forecast that the shortfalls on the fiscal account will narrow to 2% of GDP (similar to the government’s own forecast). Our outlook for 2024 is based on the expectation of rebounding trade activity, recovering domestic production and a more constrained public capital expenditure plan.

The analysis and forecasts featured in this piece can be found in EIU’s Country Analysis service. This integrated solution provides unmatched global insights covering the political and economic outlook for nearly 200 countries, enabling organisations to identify prospective opportunities and potential risks.