As far as fiscal management is concerned, the incumbent administration of President Park Geun-hye appears to be following in the footsteps of the previous government under President Lee Myung-bak, from which it has been trying to differentiate itself. It is regrettable ― and maybe inevitable ― to see the Park administration on course to maintain state largesse to push its agenda and pass the task of achieving a balanced budget over to the next government.
The pattern of delaying the timetable for striking a fiscal balance ― where the government spends within its means, causing no deficit or surplus ― was shown in a report recently submitted by the Ministry of Strategy and Finance to a ruling party lawmaker.
Shortly after its launch in 2008, the Lee administration unveiled a plan to attain a balanced budget by 2012 just before the end of its five-year tenure. But the target year was pushed back to 2014 under its long-term fiscal management plan announced in 2009 in the aftermath of the global financial crisis. Later, the timetable was advanced as the economy showed some signs of recovery, but the Lee government last year postponed it again until 2014, abandoning its initial goal of achieving a balanced budget within its term.
The incumbent administration, which was inaugurated in February, envisions that fiscal soundness will be attained by 2017 shortly before its term comes to an end. This goal has caused criticism that Park is no different from her predecessor in passing the buck on securing fiscal sanity over to the next government.
Critics even question whether it will be possible to reduce the budget deficit as planned from an estimated 1.8 percent of gross domestic product this year to 0.4 percent in 2017. As they note, the greater likelihood is that the balance sheet may not improve but deteriorate further during Park’s presidency as welfare spending is set to increase continuously while tax revenues are unlikely to grow amid a prolonged economic slump.
This practice of putting fiscal responsibility on the shoulders of the following administration should not become routine. Substantial measures need to be taken in an urgent manner, if Korea is to avoid following the course of some debt-ridden countries.
The strict budgeting rules termed pay-as-you-go, which tie new spending commitments to currently available funds without additional debt, should be introduced next year as planned by financial policymakers. There is also the need to seriously consider enacting a law that makes it mandatory to keep the public debt ratio to GDP below the previous year’s level.
It ought to be noted that fiscal management plans are designed in principle to maintain fiscal health and should be free of political considerations to meet populist demands.
What must also be tackled by the Park administration to secure fiscal soundness is to reform public pension funds. According to government figures, the amount of money to be paid from state coffers to compensate for public pension deficits is projected to total 14.9 trillion won ($14.1 billion) during Park’s five-year term, compared to 7.6 trillion won for her predecessor’s tenure. Without drastic measures to increase contributions by government employees and reduce payments to them, the burden to be taken over by the next government is forecast to reach 31.4 trillion won. The Park administration should put a brake on the increase, which the country simply cannot afford, to prevent the growing public debt from resulting in catastrophe.