[Weekly Review] Shift in Fiscal Policy from 'Super Expansionary Fiscal Policy to Expenditure Adjustment'... Electricity and Gas Prices to Rise

Five Years of Moon Administration: 130,000 More Civil Servants... Three Times Park Administration, Ten Times Lee Administration
Trade Balance Turns Deficit in March After One Month

Hong Nam-ki, Deputy Prime Minister for Economy and Minister of Economy and Finance, is speaking while presiding over the Emergency Economic Central Countermeasures Headquarters meeting held at the Government Seoul Office in Jongno-gu, Seoul, on the 31st. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Sejong=Reporter Kwon Haeyoung] Under the new government, the 'super expansionary fiscal policy' that continued throughout the Moon Jae-in administration is expected to be halted, and strong expenditure restructuring will take place. Due to rising energy prices, electricity and gas rates will be raised one after another starting this month. Despite last month's record-high export performance, imports also reached an all-time high, turning the trade balance into a deficit again within a month.

◆Government emphasizes 'Fiscal Innovation' in next year's budget＝ The Ministry of Economy and Finance approved and finalized the '2023 Budget Draft Preparation and Fund Operation Plan Guidelines' at the Cabinet meeting on the 29th of last month. The budget drafting guideline tone shifted from last year's 'active fiscal management' and 'fiscal innovation' to this year's 'necessary fiscal role' and 'comprehensive fiscal innovation.'

This indicates that the super expansionary fiscal policy pursued throughout the Moon Jae-in government will be stopped, and the Yoon Seok-yeol administration may enter a 'speed control' phase regarding government spending. The fiscal innovation details include reducing expenditures related to COVID-19 response, cutting discretionary spending by 10%, consolidating similar funds to improve government resource efficiency, and institutionalizing fiscal rules along with medium-term fiscal management plans. It is also notable that the 'Korean New Deal,' included in the 2022 budget drafting guidelines, has disappeared. Choi Sang-dae, Director of the Budget Office at the Ministry of Economy and Finance, said, "The task is to expand fiscal capacity through restructuring fiscal expenditures to support the new government's national agenda without disruption."

Next year's budget is expected to be around 638 trillion won. This figure is estimated based on the 5% increase in fiscal expenditure for next year as outlined in the '2021-2025 National Fiscal Management Plan' submitted to the National Assembly in August last year.

However, despite the Ministry of Economy and Finance's finalized budget drafting guidelines, it is expected that the guidelines will undergo significant changes as new priority tasks are reflected after the inauguration of the next government.

[Image source=Yonhap News]

◆Electricity and gas rates to rise one after another starting this month＝ According to the Ministry of Trade, Industry and Energy, from the 1st of this month, residential and general-use city gas rates used by the general public and self-employed will increase by an average of 1.8%. This is the first time the government has raised city gas rates since the rate reduction in July 2020, after 1 year and 9 months.

Due to the rate increase, starting next month, the residential gas rate will rise from the current 14.22 won per megajoule (MJ) by 0.43 won to 14.65 won. The general-use rate will be adjusted to 14.26 won, up 0.17 won, considering the supply cost reduction factor. The increase rates are 3.0% for residential and 1.2-1.3% for general use. With this increase, the average monthly gas bill per household is expected to rise by about 860 won, from 28,440 won to 29,300 won based on Seoul city standards.

Following the residential gas rate increase, electricity rates will also rise. The government raised the standard fuel cost and climate environment charges, resulting in a 6.9 won increase per kilowatt-hour (kWh) starting this month. However, since the government and Korea Electric Power Corporation (KEPCO) froze the fuel cost adjustment unit price for the second quarter on the 29th of last month, the immediate additional burden on households has been alleviated. The fuel cost adjustment unit price is a system that adjusts electricity rates quarterly based on fuel purchase costs such as oil, coal, and liquefied natural gas (LNG). Nevertheless, with the second quarter fuel cost freeze, KEPCO's management burden is expected to increase further as it faces a record loss estimated at 20 trillion won this year.

◆Despite record-high exports last month, trade balance turns to deficit within a month＝ According to the March export-import trends announced by the Ministry of Industry, last month's exports reached $63.48 billion, an 18.2% increase compared to the same period last year. This is the highest ever since the government started compiling trade statistics in 1956. Imports last month also surged 27.9% year-on-year to $63.62 billion, marking an all-time high. As a result, the trade balance recorded a deficit of $14 million. The trade balance had recorded deficits for two consecutive months in December last year and January this year, turned to a surplus in February, but reverted to a deficit within a month. Thus, the trade balance has shown a deficit of $4.04 billion from the beginning of this year through March.

The sharp increase in imports is due to the steep rise in international oil and raw material prices caused by Russia's invasion of Ukraine and other factors. Last month's energy imports amounted to $16.19 billion, more than double the $7.72 billion in the same period last year. Compared to February this year, it increased by $3.71 billion in just one month. With the prolonged Ukraine crisis causing continued surges in oil and raw material prices, and the possibility of an extension of the Shanghai lockdown period due to the resurgence of COVID-19 in China, concerns are growing that the annual trade balance may record a deficit this year.

◆Moon administration increased public servants by 130,000 over 5 years＝ It has been revealed that the Moon Jae-in administration increased the number of public servants by nearly 130,000 over the past five years. This is the result of public sector-centered 'job policies' and is three times the size of the previous Park Geun-hye administration (41,504) and ten times that of the Lee Myung-bak administration (12,116).

According to the office of Lee Myung-soo, a member of the People Power Party, and the Ministry of the Interior and Safety, the total number of public servants in South Korea was counted at 1,156,952 as of the end of 2021. This includes national and local government officials (758,024 and 380,819 respectively), as well as public servants from independent institutions such as the legislature, judiciary, Constitutional Court, and Central Election Commission. This represents a 12.4% (127,414) increase compared to the end of 2016, the year before the Moon administration took office (1,029,538). This growth rate is higher than that of the previous Park Geun-hye administration (4.19%), Lee Myung-bak administration (1.24%), and even the Roh Moo-hyun administration (8.23%).

The significant increase in public servants over the past five years is the result of the current government's commitment to creating 810,000 public sector jobs by mobilizing taxes for public jobs in public servants and public institutions. The problem is that once the number of public servants increases, it is difficult to reduce, and the expansion of personnel expenses and pension expenditures continuously imposes a heavy burden on national finances. The expansion of government organizations can also lead to stricter regulations and dampen private sector vitality. With the next government's organizational reform plan imminent, there are calls for urgent efficiency improvements in the bloated government organization over the past five years.

This content was produced with the assistance of AI translation services.