Korea's fiscal balance will return to surplus

The Korean government announced its 2016 budget proposal on 8 September, which contains fiscal tightening as we had anticipated. Finance Minister Choi's recent comment that the 2016 budget would be expansionary has turned out to be incorrect. The government maintains that the 2016 budget is expansionary via a comparison with the original 2015 budget and emphasising the sustained deficit in the fiscal balance under management. 

"However, the comparison with the 2015 supplementary budget shows that the 2016 budget is not expansionary. According to 2016 budget proposal, the consolidated fiscal balance is planned to shift from a deficit of 0.5% of GDP in the 2015 supplementary budget to a surplus of 0.3%, which is largely in line with our forecast of a surplus of 0.2% of GDP", says Societe Generale. 

Fiscal balance under management, the figure that the Korean government uses as a benchmark for fiscal policy, is planned to show a smaller deficit of 2.3% of GDP in 2016 after a deficit of 3.0% in 2015.

"Compared with the 2015 supplementary budget, fiscal revenue growth is planned to accelerate from 2.3% to 3.7%, while tax revenue growth is planned to slow from 5.0% to 3.4%. These revenue growth targets are under the assumption of 3.3% real and 4.2% nominal GDP growth, which is quite similar to our own forecasts of 3.2% real and 4.7% nominal growth", added Societe Generale.