South Korea GDP is estimated to be around $1 trillion which is about 1.6% of the world economy. This compares favorably with the record high of $1.05 trillion it achieved before the 2008 financial crisis. This indicates that the country is experiencing an economic boom and is poised for further economic growth in the short term. South Korea’s GDP grew by 3.4% in late this year as compared to the same period last year. Over the past few years, the country’s average annual GDP growth has been estimated to be 7%. This simply means that, in general, the country has been improving economically (Trading Economics). The graphs below show the GDP as of 2011 and the GDP annual growth.
South Korea’s consumer confidence rose this year by a point (from 99 last year to 100 this year). This means that a majority of the citizens view the economy as expanding. Consumers who have a lot of confidence in the economy tend to spend more. Therefore, the industries and enterprises will report booming business due to more sales. This in effect will lead to more government revenues (Trading Economics).
South Korea’s business confidence also improved from 81 last year to 82 this year. This means that a majority of major business and industrial players in the country view the economy as expanding (Trading Economics). This suggests that they will more likely produce more which will translate to more sales. The government will benefit as a result of more revenues from the increased trading.
South Korea Fiscal Policy
South Korea national finance is geared towards enhancing growth. The government has tried to maintain a low tax burden and the budget is always small. It has also put up policies to make the markets very free for a better business environment (Yun-hi).
The government has been stricter in the country’s administration of loans by banks and mortgage companies. This is supposed to prevent a housing crisis and escalating interest rates (China View). This protects the real estate companies as the housing prices are stabilized. The people benefit from low bank loans interest rates. This will encourage them to take up loans and these monies can be used as capital to set up businesses. The government will eventually benefit from increased taxes.
The government has also embarked on expanding a fiscal policy to around 5% of the GDP since the end of the economic crisis. This has led the country to attain a stable fiscal balance in recent years. This has been crucial in the country’s economic growth and has helped it maintain a respectable pubic finance even during the crisis as it experienced a 4.1% GDP deficit, a figure lower than other G20 countries (Yun-hi).
The government has projected that it should reach a fiscal surplus in two years time. Therefore, it has come up with an expenditure programme that will guide its revenues and spending such that growth in expenditure is kept at 3% of the growth in revenue (Yun-hi). This indicates that the government is committed to reduce its expenditures and focus more on sectors that will drive the economy.
Government Income and Spending
In the latest budget proposal, the government estimates to spend 309.1 trillion won in this fiscal year. This is a 5.5% increase from last year’s expenditure. A large portion of this amount (33.2 trillion) will be spent on defense (YonHap News). This is very crucial as a country’s security is very crucial for any business activity. A more secure nation will give businesses confidence to go about their activities without fear of losses as a result of attacks. This will translate to more business activities hence more revenue for the government.
The government also proposed to spend 9.5 trillion won for job creation (YonHap News). This programme especially targets the youth, the older members of the society and the poor. The government projects that it will be successful in creating about half a million job opportunities. Job creation will increase the South Koreans purchasing power hence more business activities. The citizens who will benefit from this scheme may use the income to invest which will lead to more government revenues. This scheme will also reduce government dependence. The government will also spend some 200 billion won in helping the youth open their own business enterprises.
The health and welfare sector will benefit from about 92 trillion won (YonHap News). A healthy nation is crucial for economic growth. This is because the available workforce is maximized and also productive. Improvement in health will reduce the mortality rate of the citizens which is important for a country that has a large proportion of old people. Reduced mortality rates will maintain the current workforce.
The education system of South Korea has been lauded for producing some innovative graduates. Therefore, the government boosted the education by allocating it 45.1 trillion won (YonHap News). This is important as this will help the country continue to produce more skilled manpower. This will boost further the country’s economic expansion.
The government of South Korea projected that it will generate around 344.1 trillion during this fiscal year. As expected, the main revenue generator for the government is from taxes. It projects to generate 205.9 trillion won from taxes. Revenue from non tax sources is approximated to be about 28.6 trillion won. Fund operations should generate around 109.6 trillion won. On overall, this income is about 10% more from the current income (YonHap News).
In the past few years, the government has not met its income targets. In this fiscal year, the government has indeed acknowledged that it will again post a budget deficit (YonHap News). While this disparity is small, it simply means that probably the government is too optimistic, rather than realistic, in its income projections. Additionally, it may mean that it is spending more than it had planned.
South Korea maintains a relatively average income tax rates. The South Korean employees pay a tax income of about 38%. The corporate in the country are taxed about 24% of their income. The sales tax is charged at 10%.
The citizens of South Korea are mostly employed. The employees of South Korea are taxed about 38% of their income. Reducing this rate may be beneficial to the employees in the short term, but will be detrimental to government activities as it revenues will be reduced. Increasing this tax rate may have the opposite effect. This option may also reduce the employees’ spending power. This will impact the business sector negatively which will in turn reduce the government revenues. Therefore, the government should maintain the current income rate.
Increasing the corporate and sales tax may act as a deterrent for business expansion as the businesses will see a significant portion of their profits taken away. The banks play an important role in economic expansion as they offer business loans to individuals and businesses. To encourage them to offer low interest rates on their loans, the government should maintain the current tax rate. Since the country has experienced expansive economic growth, purchase taxes should be maintained for more economic growth.
The government has so far made some positive steps in bringing South Korea out of the economic crisis. However, an ageing population may bring this expansion down. The government has thus to protect the current workforce. This can be done by supporting the education sector more so that manpower is produced at a rate that will replace this ageing workforce. The government also has to create more job opportunities for its people. Lastly, the inflation has to be kept at the lowest rate.