Only select areas, e.g., welfare, childcare, and strategic industries, will see meaningful funding increases in 2024
The proposed 2024 budget holds significant upside for B2B multinationals. Seoul’s continued investment in the four strategic industries: semiconductors, displays, batteries, and biotech, will drive greater investments in these sectors and create greater growth opportunities for firms with exposure to them. A key point to note is that the investment and tax incentives offered to firms in these industries are scaled to the size of the firm, with smaller firms enjoying greater support than large conglomerates. As a result, local start-ups and SMEs will be the biggest winners, and multinationals should target these firms for potential business opportunities and partnerships. Moreover, the acceleration of public investment into digitalization will drive demand for firms that operate in, or feed into, the ICT sector.
B2G and B2B firms that vie for government contracts should expect tighter fiscal management and oversight around these projects in 2024. President Yoon Suk Yeol’s administration aims to more strictly manage public expenditures, which will likely create increased compliance and regulatory hurdles for winning and working on such projects.
Finally, B2C firms may see some upside from the expansion of governmental welfare and childcare programs. Young families and lower-income households will see an increase in purchasing power over the next few years, creating demand opportunities for products targeted toward these consumer segments.
President Yoon is maintaining his pledge to exercise restraint around public spending with the proposed national budget for 2024. The overall budget is only set to grow by 2.9% YOY (from KRW 638.7 trillion to KRW 656.9 trillion), the smallest increase since 2006. Concerningly, the decision to moderate public spending comes at a time when prices are surging. With inflation forecasted to average 3.3% in 2023 and 2.4% in 2024, the budget is not growing in real terms. Instead, the Yoon administration hopes to streamline and focus public expenditures by “reducing discretionary spending and optimizing mandatory expenditures”. As a result, the 2024 budget sees the government doubling down on priority areas while cutting funding where it can. The key changes in the 2024 budget proposal are as follows:
- Social welfare: Welfare programs have once again emerged as the key priority of the Yoon administration, with funding set to increase by 13.7% to KRW 104.8 trillion. Support programs for low-income households, unemployed persons, and the elderly are set to expand in 2024.
- Healthcare: Healthcare funding will increase by only 4% next year. However, this figure disguises the changes that the industry is set to experience. Funding for medical care will decrease by 19.5%, to KRW 3.7 trillion, while expenditure on health insurance will grow by 12.6%, to KRW 14 trillion. This divergence is explained by the fact that Seoul is aiming to expand access to medical coverage while also trying to make the healthcare system more efficient by funneling patients from large hospitals to local clinics.
- Strategic industries: Korea’s four national strategic industries—semiconductors, displays, batteries, and biotech—will continue to be well funded. KRW 5 trillion will be allocated toward R&D, with an additional KRW 2 trillion going toward strengthening infrastructure for the industries. KRW 1.9 trillion will also go toward training and developing a home-grown workforce for these sectors. Finally, these industries (as well as video production houses) will benefit from targeted tax incentives in 2024 as well.
- Raising the birth rate: A number of policies were also unveiled to incentivize Koreans to have more children, such as extension of parental leave, expansion of monthly allowances for parents, assistance for young families to ensure housing stability, and easier access to medical services.
- R&D: While R&D funding is growing for strategic industries, the overall budget allocation for the sector will decline by 16.6%, to KRW 26 trillion. This will greatly impact universities, think tanks, and other research centers that are conducting studies in various fields such as aerospace and advanced sciences.
South Korea’s proposed budget will now be debated and finalized in the National Assembly, where it must be passed by December 2.
The Yoon administration’s decision to prioritize fiscal prudence in its latest budget is unsurprising. The President has continually pursued―or attempted to pursue―the policy objectives he laid out during his initial presidential campaign, even if some of those decisions have been unpopular with the general public. As a result, Yoon’s aim to rein in public spending is unlikely to falter, and future budgets will remain conservative, rather than expansive, through the remainder of his term in office. Government estimates show that the average annual growth in public spending from 2023 to 2027 will be 3.6% (compared to the pre-pandemic average growth rate of 4.8% between 2015 and 2019).
The other key theme that has emerged in the budget is tighter management of public finances. While government departments were drafting their budget requests, they were encouraged to pursue “bold restructuring” and eliminate funding for government units that misappropriated funds. The decisions to slash the R&D budget and lower funding for public administration and education were driven by a desire to crack down on corruption and prevent “vested interests” from exercising control over these funds. In addition, the government aims to accelerate development of the Digital Platform Government and data sharing across public and private systems to accurately monitor funds received and services rendered by public agencies.
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