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SEJONG (Reuters) - South Korea's new government announced a 11.2 trillion won ($10 billion) fiscal stimulus package on Monday, increasing social welfare subsidies and taking steps to deliver on President Moon Jae-in's election promise to create 810,000 public sector jobs.
But Moon's ruling Democratic Party faces a challenge passing the extra budget bill as it only holds 40 percent of the 299 seats in the National Assembly and would need the support of more than 30 opposition lawmakers.
Both parties in the conservative opposition - the Bareun Party and the Liberty Korea Party - have said the increased welfare spending could become unsustainable and that the plan does not meet legal requirements.
The stimulus package allocates 5.4 trillion won to create public sector and social services jobs, including places for fire fighters, teachers and postal workers, the finance ministry said.
Another 2.3 trillion won will be used to provide subsidies for maternity leave and for elderly people needing medical care.
The government estimates the extra spending will boost economic growth by 0.2 percentage point this year, which may raise its 2017 outlook from current 2.6 percent.
It expects to the extra budget to add 71,000 jobs to the public sector workforce and 15,000 jobs to the private sector.
"This is the first supplementary budget for jobs purposes," Park Chun-sup, South Korea's chief of budget, told a news conference.
"There are concerns over mass job losses...10 years ago youth unemployment used to be double the overall jobless rate of 3.5 percent, but now it is three times as high," Park said.
Unemployment among those aged 15-29 soared to 11.2 percent in April, even though the economy posted the fastest growth in six quarters in the January-March period.
Addressing a widening income gap and sluggish domestic demand is a major challenge for policymakers, especially as exports have only just begun to turn around after falling for almost two years.
South Korea’s average disposable household income fell by 1.1 percent in the fourth quarter, the fastest rate since the 2009 global financial crisis, while private consumption grew just 0.4 percent in the first quarter - well below overall economic growth at 1.1 percent.
"Regarding weak consumption, we believe adding jobs will boost income and affect consumption eventually," Park said.
The supplementary budget will add to the 400.5 trillion won budget for 2017 that was approved by the National Assembly late last year.
The government plans to submit its supplementary budget proposal to the National Assembly on June 7.
About 8.8 trillion won of the extra budget will be financed by excess tax revenue expected for this year, while another 1.1 trillion won will come from government revenue left over from 2016.
The remaining 1.3 trillion won will be financed from public funds managed by state-owned companies, according to the ministry.
"As we propose this supplementary budget, our intention is to best maintain fiscal soundness and we're not issuing more debt," budget chief Park said.
Cheon Jong-ryeol, a 30-year old job seeker, agrees with the government's plan to create more public sector jobs.
"Everybody wants to get a civil service job, I mean everybody. I want to take a look at what becomes available from this policy and want to apply," said Cheon, who recently returned from an English language programme in Canada.
Like many others, he is still looking for work, having postponed graduation from college by two years to complete compulsory military service, before going to Canada.
"All jobs are really competitive, and my friends have told me that public sector jobs have less late-night work and office dinners, so I see competition for public servant jobs becoming tougher."
Although the proposed extra budget is only for this year, the government is under pressure to raise taxes to sustain expanded welfare programmes and to meet the growing needs of an ageing population.
On Thursday, Lee Yong-sup, the head of President Moon's jobs committee, said South Korea needed to raise taxes in order to pay for more jobs and welfare.
Calls for government subsidies will only increase as more than 35,000 workers are expected to be laid off by the end of this year from the shipbuilding industry alone.
About 41,000 workers lost their jobs at shipbuilders between December 2015 and February this year, according to the labour ministry, as a broad global downturn in demand and plunging commodity prices sapped the industry.
($1 = 1,120.2000 won)
Reporting by Cynthia Kim; Editing by Eric Meijer & Simon Cameron-Moore