Election results expected to fuel social spending in South Korea

With an amount pegged at USD77.7bn, around 7% of the 2011 GDP, how will this impact the nation's coffers?

The social spending bill is set to jump after Saenuri Party's recent National Assembly election win, but Fitch Ratings does not expect this to lead to a significant deterioration in public finances, given the government's track record of being fiscally responsible. 

Here's more from the Fitch Press Release: 

South Korea's social spending bill will jump after its recent National Assembly election, but Fitch Ratings does not expect this to lead to a significant deterioration in public finances.

The incumbent Saenuri Party won the elections, albeit by a smaller margin. The party was under pressure to promise a considerable increase in spending in response to public pressure - - and, more broadly, to address the rising inequality in income.

An increase in spending does not change the Positive Outlook we placed on Korea's 'A+' Foreign Currency rating in November. This is partly because the sovereign's own external balance sheet is stronger than the peer median; and partly because we expect that if the Saenuri Party does carry out its spending pledge, this would most likely be accompanied by higher taxes.

The ruling party has estimated its social spending would cost KRW89trn (USD77.7bn), according to the Korea Herald. This would amount to 7% of 2011 GDP.

Recent trends show that the government has remained fiscally responsible, which Fitch considers to be one of its key rating strengths. In addition, the ruling party had previously outlined a medium-term fiscal strategy to balance the budget (excluding social security funds) by 2013. Any increase in spending is not likely to alter the overall direction of fiscal consolidation, but may reduce the pace.

The government reported at the beginning of the week that the 2011 budget balance (excluding social security funds) recorded a deficit of 1.1% of GDP, which was lower than the government's original target of 2.0% of GDP. In turn, the consolidated budget balance, which includes social security funds, recorded a surplus of 1.5% of GDP, compared with 1.4% of GDP in 2010.

Before the election, the government had laid out its medium-term fiscal strategy for 2011-2015, targeting an annual fiscal surplus averaging 1.8% of GDP over the period. This could deliver a reduction in the government debt/GDP ratio to 27.9% by end-2015 (government definitions excluding some guaranteed items included by Fitch), which would be below the 29.7% at end-2007, i.e. before the global crisis.