Cuts, tax hikes inevitable if growth stays sluggish
Published : 2013-09-01 20:49
Updated : 2013-09-01 20:49
Korea is standing its ground at a time when some Asian countries, such as India and Indonesia, and other emerging economies are taking a drubbing as the United States prepares to phase out quantitative easing. The Korean currency remains stable while stocks are rallying.
No wonder Korea is now touted as one of the most attractive investment markets among the emerging economies. The Korean economy, policymakers say with confidence, will be able to fight back a financial squeeze, should it come as a consequence of cheap financing coming to an end. Their optimism is based on what they call sound fundamentals.
Indeed, foreign exchange reserves have expanded to $330 billion as Korea has continued to generate consecutive monthly current account surpluses since February 2012. Its short-term foreign debt as a percentage of the total external debt is the lowest since the third quarter of 1999 ― at 29.1 percent at the end of June. Growth is recovering, albeit at a snail’s pace.
But not all economic fundamentals are sound, as evidenced by an enormous fiscal deficit the Korean government sustained in the first half of this year. The deficit, the largest ever, amounted to 46.2 trillion won.
Policymakers sound smug when they claim that it is not unusual to sustain a huge fiscal deficit in the first half of a year. The reason, they say, is that the government customarily frontloads spending. Maybe so. As they say, more money was allocated for the first half this year.
But here the size matters. The deficit this time topped the previous high ― 40.5 trillion won in the first half of 2009. A first-half deficit approaching 50 trillion won is anything but normal. On the contrary, it poses one of the biggest challenges for President Park Geun-hye’s administration since it was inaugurated six months ago.
Another reason for the huge increase in the fiscal deficit was that tax collection fell short of the target. Tax revenues dropped by more than 10 trillion won from the first half of last year. Revenues from value-added taxes and corporate taxes alone declined 2 trillion won and 4 trillion won, respectively ― an unmistakable indication that the economic slump was being protracted.
A solution lies in growth. Economic experts say the Park administration will be able to attain its goal of pushing the 2013 fiscal deficit below 23 trillion won if the growth rate bounces back to more than 3.5 percent during the second half. But not many are optimistic about the growth outlook, with landmines strewn all along the path to full recovery.
Fiscal soundness, if sacrificed to meet a growing demand for welfare, will undermine the nation’s creditworthiness. That is why the Park administration will have to strive to balance annual budgets in the near future. Options are few. The administration will have to spend less, collect more taxes, in particular from the wealthy, or both, if growth remains sluggish.