SEJONG (REUTERS) - South Korea raised its growth outlook for this year on Tuesday (July 25) and vowed to maintain an expansionary fiscal policy that would support job creation.
The government projected economic expansion of 3 per cent in 2017, the fastest since growth of 3.3 per cent seen in 2014.
The finance ministry's latest outlook revised growth up from an earlier estimate of 2.6 per cent and put it above the Bank of Korea's forecast 2.8 per cent.
It sees improving global demand for South Korean goods supporting growth in the second half of 2017, along with increased fiscal spending from the 11 trillion won (S$13.41 billion) supplementary budget approved on July 22.
The ministry said the extra budget would lift growth by 0.2 percentage point this year, although Nomura said the supplementary budget's 0.2 per cent boost to GDP growth was already included in its estimate of 2.7 per cent for 2017.
The government sees exports surging 10.2 per cent this year, although private consumption is expected to grow at a slower 2.3 per cent because of waning job growth and record household debt.
"South Korea's potential growth rate is around 3 per cent. As we noted earlier, posting 3 per cent expansion looks achievable assuming the economy continues to undertake reforms for consumption-led growth," deputy finance minister Lee Chan Woo told an embargoed briefing.
"Going forward, our budget, tax and other policies will be reformed to better focus on creating jobs," he said.
Job creation has led President Moon Jae In's policies since he took office in May, as he seeks to generate growth more from household spending and less from exports.
He plans to revise regulations to reduce the dominance of South Korea's giant "chaebol" conglomerates and subsidise smaller businesses to promote balanced growth.
South Korea's exports have soared this year, thanks to a revival in global demand, but domestic consumption has lagged because of tepid wage growth.
The government will increase unemployment benefits and subsidies for maternity leave as well as spending more on medical care for elderly people.
Deputy finance minister Lee said the government would work to ensure the pace of spending growth "stays higher than" the nation's nominal growth rate - which ignores inflation - currently estimated between 4.5 per cent and 5 per cent.
Government spending rose at an average rate of 4.8 per cent in annualised terms over the past five years, the ministry said.
Turning to current economic conditions, the ministry said the rate of export growth could slow in the second half of this year because of weakening oil prices.
Rapid household debt growth was also a threat to growth, it added, as rising bond yields added to consumers' repayment burden at a time of record household debt.
The government plans to tighten borrowing rules to make sure banks assess loan applications more strictly and will encourage borrowers to refinance their debts as a fixed-rate loan.
Separately, the ministry also said it will coordinate with the Bank of Korea to make sure the central bank's key lending facility for small and medium-sized businesses supports job growth more effectively.