Published : 2013-09-27 21:12
Updated : 2013-09-27 21:12
In 2014, President Park Geun-hye’s administration foresees 370.7 trillion won in revenue and 357.7 trillion won in spending, both in its 2014 consolidated budget request. But no one should be overwhelmed by the consolidated budget surplus, which is far from a rigorous measure of fiscal soundness.
A more meticulous measure is the operational budget balance, which is defined as the consolidated budget balance minus the social security balance, plus the redemption of public funds. The 2014 operational budget request foresees a deficit of 25.9 trillion won, or 1.8 percent of gross domestic product.
Even more disconcerting is the forecast that none of the five operational budgets for the Park administration will be balanced or made to produce a surplus. The hope, instilled by the previous administration, that the budget would be balanced in 2014 will go down the drain.
One of the most serious consequences will be snowballing national debt. The national debt, which is projected to stand at 480.3 trillion won by year-end, is forecast to break the 500 trillion won mark and rise to 515.2 trillion won next year, and jump to 610 trillion won by the end of 2017, Park’s final year in office.
Even these gloomy forecasts are based on the rosy assumption that the economy will remain strong next year and thereafter, growing at an annual average rate of 4 percent, up from the 2.7 percent estimate for this year.
The main culprit is ballooning welfare spending. The amount of money earmarked for welfare programs will surpass the 100 trillion won mark and increase to 105.9 trillion won in 2014, up 8.7 percent from this year. Welfare spending grows almost twice as fast as overall expenditures, which are projected to increase 4.6 percent.
True, the Park administration has decided to scale back a plan to provide everyone aged 65 or older with basic pension benefits and to cut subsidies for university tuition fees. Nevertheless, welfare spending is set to grow rapidly in the years ahead, with Park promising to make good on her welfare election promises before her term in office expires in February 2018. She regrets some of them cannot be fulfilled next year because of the current difficult fiscal conditions.
Not many goals may be as worthwhile as improving the quality of life by spending more on welfare. But the Park administration must not try to attain this goal at the expense of fiscal prudence. Instead, it will have to finance its welfare programs with an increase in taxes instead of borrowing. More taxes can be collected from households and corporations, with Korea’s tax revenue as a percentage of GDP much lower than the OECD average.