MOSF Eyes Achieving Balanced Finance in 2013 or 2014

Korea enjoys stable fiscal soundness with Korea's fiscal debt standing at an estimated 33.5 percent of GDP in 2010




Yoo Sung-kull, vice minister of the Ministry of Strategy and Finance (MOSF), explains the 2011 government budget plan.

Countries have turned to an expansionary fiscal policy to tide over the effects of the 2008 global financial crisis. Korea is no exception to this trend. Consequently, the nation has successfully turned around the sagging economy by embracing aggressive and pre-emptive fiscal policies.
The Korean government is now tightening its fiscal management of total operating expenses and operating revenues in order to turn around a fiscal balance with an emphasis on massive investments in key tasks designed to stabilize the lives of the general public, brace for the future and improve the quality of life.
"It (the 2011 budget management plan) calls for setting the growth of the total operational expenditures at 5.5 percent, lower than 8.1 percent, the increase rate of the total operational revenues, by enhancing fiscal spending efficiency," said Yoo Sung-kull, vice minister of the Ministry of Strategy and Finance (MOSF). As a result of pursuing the plan, the operational budget deficit of the central government will decrease substantially, he said.
"Korea's government debt stood at an estimated 33.5 percent of GDP in 2010, and it is considered to be stable in relation to the 96.9 percent average among OECD countries and 76.1 percent average for G20 countries," Yoo said.
But he warned that even though the nation's government debt is stable, as Korea is a small open economy vulnerable to external shocks, it needs to prepare for a low birth rate, an aging society and the unification of the Korean Peninsula in the long run.
The MOSF vice minister said, "The MOSF plans to achieve the balanced finance between 2013 and 2014 by keeping the growth rate of expenditures two or three percentage points lower than that of revenues every year. The national fiscal management plan for 2010 and 2014 calls for setting the annual average revenue growth rate at 7.7 percent and the annual average expenditure growth rate at 4.8 percent." The following are excerpts of an interview between NewsWorld and the MOSF vice minister.

Question: Will you tell us about the current status and characteristics of the 2011 government budget?
Answer: The 2011 budget management plan focuses on improving fiscal management of total operating expenses and operating revenues in order to turn around the fiscal balance, which has been undermined in the course of overcoming the global financial crisis, as well as massive investments in key tasks, designed to stabilize the lives of the general public, brace for the future and improve the quality of life on a choice & focus basis.
It calls for setting the growth of total operational expenditures at 5.5 percent, lower than 8.1 percent, the increase rate of total operational revenues, by enhancing fiscal spending efficiency. As a result of pursuing the plan, the operational budget deficit of the central government will decrease substantially.
The government attaches investment priority on implementing projects to stabilize the people's livelihood and enhance growth potential -- the top eight core tasks are related to people in the low-income bracket and vulnerable groups as well as the strengthening of future investments to reverse growth potential sluggishness, caused by the effects of the global financial crisis, and to promote sustainable growth and a future leap forward in such areas as new growth engines, green growth and R&D.

Q: Will you give us specifics on the 2012 budget plan?
A: The compilation of the 2012 budget plan will be complicated due to the schedule of major political events, including the 2012 general elections and 2012 presidential election, so budget requests for various kinds of projects will increase sharply. The guidelines for the compilation of the 2012 budget plan, calling for eliminating inefficiencies and reducing waste, have already been sent to each ministry.
The 2012 budget plan, the last of the Lee Myung-bak government, will focus on the implementation of essential tasks -- the first theme is for giving the general public including those in the low-income bracket and multicultural families hope by supporting employment, expanding education investment, relieving the burden on basic cost of living, and providing childcare assistance. The second theme is for investing in green growth industries and creative R&D for the future. And the third theme is on the strengthening of national defense in the wake of North Korea's sinking of the South Korean Navy ship Cheonan and the shelling of Yeonpyeong Island off the west coast last year, and preparedness for such natural disasters as earthquakes and tsunamis, as well as the protection of youth and women.

Q: Will you explain the nation's national debt levels and future predictions?
A: The government debt was estimated to rise by 33.2 trillion Korean won from 2009 to 392.8 trillion won in 2010, representing 33.5 percent of GDP. The government's expansionary fiscal policy for overcoming the global financial crisis for the past two years between 2009 and 2010 brought about a rise of an estimated 83.8 trillion won in the 2010 fiscal debt.
Financial debts amounted to an estimated 199.0 trillion won, accounting for 50.6 percent of the total government debt in 2010. Financial debts can be repayable without additional fiscal burden due to the existence of corresponding assets. On the other hand, deficit-incurred debts accounted for 49.4 percent or an estimated 193.9 trillion won in 2010, a surge of 66.5 trillion won from 127.4 trillion in 2007, in the course of overcoming the global financial crisis.
Korea's government debt stood at an estimated 33.5 percent of GDP in 2010, and it is relatively in a stable condition compared to the 96.9 percent average for OECD countries and the 76.1 percent average for G20 countries. Figures released by the Organization for Economic Cooperation and Development (OECD) showed the corresponding figures were 81.3 percent for the United Kingdom, 92.4 percent for France, 92.8 percent for the United States, 198.4 percent for Japan, 79.9 percent for Germany.
The annual average increase rate in Korea's government debt to GDP stood at 3.1 percent during the period between 2006 and 2010, lower than the 4.9 percent average of the OECD countries during the same period.
The OECD countries's government debt is forecast to surge 20.6 percentage points in 2010 over 2005, while for Korea, the expansion is projected to grow 4.8 percentage points during the same period.
Even though the nation's government debt is stable, Korea is more vulnerable to external shocks, and it needs to prepare for a low birth rate and an aging society and the unification of the Korean Peninsula in the long run Korea's government debt, which has risen due to an expansionary fiscal policy to overcome the 2008 global financial crisis, is predicted to hit a record high in terms of the ratio to GDP in 2011.
But the nation's government debt is projected to begin to decline in 2012 and stabilize in the low 30-percent range of GDP in 2014 or after.
To this end, the government plans to expand the tax base by curtailing tax incentives and by introducing a tax certification system, while continuously pushing ahead with the restructuring of expenditures by merging and consolidating projects with insufficient performances as well as similar and overlapping ones.
The MOSF plans to achieve the balanced finance between 2013 and 2014 by keeping the growth rate of expenditures two or three percentage points lower than that of revenues every year. The national fiscal management plan between 2010 and 2014 calls for setting the annual average revenue growth rate at 7.7 percent and the annual average expenditure growth rate at 4.8 percent.

Q: What strategies has the ministry adopted to boost the domestic government bond market?
A: The Korean government bond market, which was activated in earnest in the wake of the 1997 Asian financial crisis, has seen tremendous growth. In particular, the market has maintained solid growth despite the recent global financial crisis, financial woes that hit southern Europe and the surging risk of North Korean provocations. Outstanding government bond issuances amounted to 310.1 trillion won as of the end of 2010, representing a seven-fold jump from 42.6 trillion won at the end of 2000, and the value of bond trading surged to about 2,000 trillion won. Foreign media organizations gave a favorable assessment of the growth prospects of the Korean government bond market. The Financial Times reported on March 28 that Korea has become one of the best markets in Asia in terms of fluidity and market depth. The government has implemented institutional reform measures, including the elevation of preliminary primary dealers (PPDs) into primary dealers (PDs), based on performances since 2009.
The MOSF plans to focus on stabilizing the government bond market and making sure to lay a solid foundation for the institutional reform measures it has so far implemented.
Above all, balanced government bond issuances will be maintained on a monthly basis to prevent interest rate fluctuations, caused by an imbalance of supply and demand. The ministry strives to boost in-house trading of government bonds and solidify the implementation of recent steps to revamp the PD system.
We have redoubled efforts to reinforce institutional reform so that the domestic government bond market can be developed into a magnet for long-term investments.
The government attaches priority on invigorating the long-term government bond futures market at the earliest possible date as a means to hedge against risks of long-term bonds.
It plans to strengthen communications with markets through PD consultation committees for enhancing consistency of systems and their smooth implementation.
As part of efforts to help the domestic government bond market go global, the MOSF and the International Monetary Fund will jointly host the Public Debt Management Forum (PDMF), the first of its kind in Asia, on June 11, this year.
The government also plans to implement the Knowledge Sharing Program of the domestic government bond market without a hitch of a view on contributing to the development of the government bond markets of developing countries by sharing the Korea's experiences during the development course of its market.

Q: Will you elaborate on the government's management evaluation of public institutions and the revamping of their compensation systems?
A:A management performance evaluation team composed of experts from the private sector was launched to evaluate business performances of around 100 public institutions － 21 public corporations and 79 quasi-government institutions, 96 institutions heads, and management autonomy in 4 institutions. Prof. Lee Chang-woo at Seoul National University heads the team. The outcomes of the evaluations for most of institutions will be determined by June 20, 2011, but the results will be submitted to relevant ministries and public institutions for petition in May before the Committee on the Management of Public Institutions confirms them. Four public corporations's management autonomy － Korea District Heating Corp., Industrial Bank of Korea, Incheon International Airport Corp. and Korea Gas Corp. － is usually assessed between March and April 30, and therefore last year's evaluation was decided by the committee on May 2, 2011
In December 2010, the government has slightly amended the management evaluation standards, emphasizing more on profligate management prevention and fiscal soundness enhancement. These changes will be reflected from the next year's management evaluation.
Public institutions had long adopted a conventional compensation system based on the years of service by employees without their productivity or business performance being taken into consideration.
The government recommended June 2010 that public entities introduce a performance-based compensation system where salaries of employees are to be paid in accordance with their business performance outcomes and capabilities.
The principle of the newly-introduced performance-based compensation system is "differentiated increases"in basic annual salaries and incentives among employees, which means the highest paid person can possibly get more than double the amount of incentives that the lowest can get; the existing seniority-based salary increase table was abolished. The pay gaps among workers will be further widened on a step-by-step basis.
All public corporations and quasi-government institutions have now adopted and implemented the performance-based compensation system. The MOSF will make continued efforts to ensure the success of the new payroll system by thoroughly monitoring and constantly updating the performance evaluation system.

Q: Will you give us some tips on what measures were taken to reform the management of state-owned properties?
A:Each ministry's partitioned management of state-owned properties, following the legislation of the Act on State-owned Properties in 1950, has come under fire for being inefficient. The government worked out steps to overhaul the management of state-owned properties last June and the revisions of the related laws went into effect on April 1.
The amendment of the Act on State-owned Properties stipulates that the MOSF is charged with integrating the management of state-owned assets and each ministry is required to gain approval on the use of necessary properties. The MOSF maps out and implements mid- and long-term state-owned properties's management plans by integrating and fine-tuning each ministry's plans to manage and dispose of its state assets. A state property management fund will be inaugurated and charged with integrating and managing the acquisition of public properties, including each ministry's buildings and official residences.
The government also introduced an act on the restriction of exceptions of state-owned properties so that special privileges, including the free use of state properties, can be managed in a systematic manner by preventing the indiscreet spread of exceptions and privileges by scrutinizing the existing and new exceptions.
The institutional reform measures are expected to promote the efficient management of state properties and availability as well as to contribute to the enhancing of fiscal soundness.

MOSF Vice Minister Yoo speaks at a meeting on the 2011 government budget plan.


Q:Will you touch on the current status and prospects of Korea's Official Development Assistance (ODA)?
A: Korea was once the recipient of approximately $12.7 billion from the international community, which was used to boost the nation's economic development.
January 2010, the nation became a regular member country of the OECD Development Assistance Committee, an international forum where donor governments and multilateral organizations discuss issues about aid, development and poverty reduction of developing countries. Korea, once an aid recipient, has changed into a donor country, an example to developing countries of successful development.
Korea's full-fledged ODA program began in the 1990s when the nation established an overseas development assistance framework by inaugurating the Economic Development Cooperation Fund (EDCF) in 1987 and the Korea International Cooperation Agency (KOICA) in 1991. Korea provided about $6.9 billion in ODA during the period between 1987 and 2009, 68 percent of which was funneled to the Asian region.
Korea now serves as a bridge to link advanced and developing economies, as the nation became the first non-G7 country and the first Asian country to host the G20 Summit last December. The G20 countries agreed on development agendas, initiated by Korea, and on fleshing out financial safety nets. In particular, the participating countries adopted the Seoul Development Consensus for Shared Growth, designed to help developing countries build capacity to achieve and maximize their growth potential.
The government plans to scale up its ODA to 0.15 percent of gross naional income (GNI) in 2012, commensurate with its international standing and economic power.
It has established country-by-country strategies to provide ODA priority to eight areas, including health and medical care, personnel resources, administration/ICT, land construction and industry.
Korea will host the Forth High Level Forum on Aid Effectiveness in Busan, being organized by the OECD this coming November, serving as a bridge between advanced and developing countries.
The nation strives to step up its contribution to international society by faithfully making good on its promise to shoulder its dues to Peace Keeping Operation (PKO) and other international organizations. nw

MOSF Vice Minister Yoo holds an interview
NewsWorld President-Publisher Elizabeth M.oh


Photos on Courtesy of the Ministry of Strategy and Finance