OPINION

[Editorial] Tax-fueled growth

By Korea Herald

Reckless spending needs to be curbed to secure fiscal room to address external risks

  • Published : Aug 11, 2019 - 17:11
  • Updated : Aug 11, 2019 - 17:11

South Korea’s fiscal deficit soared to a record high in the first half of the year, according to a monthly report released by the Ministry of Economy and Finance last week.

Over the cited period, the overall fiscal balance, which is calculated as the difference between a government’s total revenue, including taxes and proceeds from asset sales, and its total expenditure, recorded a deficit of 19.4 trillion won ($16 billion).

In particular, the managed fiscal balance, which refers to the overall balance excluding social security funds, ballooned to 59.5 trillion won, the largest since 2011 when related data began being compiled. This provides a more accurate picture of the state of fiscal management.

The record fiscal deficit resulted from a combination of a steep increase in government spending and a negative turn in tax revenue.

President Moon Jae-in’s government spent 284.5 trillion won in the first six months of 2019, up 37.2 trillion won from the year before, to help shore up the sagging economy and finance expanded welfare and employment programs. Whereas, its total revenue increased by 2.3 trillion won on-year to 246 trillion won in the January-June period, with tax collection declining by 1 trillion won to 156.2 trillion won.

What is worrying is that the fiscal deficit will most likely widen down the road, as the Moon government is poised to adhere to an expansionary fiscal policy despite the likelihood that tax revenue will fall in the years to come.

But the poor economic performance over the past two years since it assumed office in 2017 calls for a fundamental shift from its misguided policy.

It has been proven that just relying on using more taxpayer money does little to bolster the economy and increase employment.

The country has seen its economic growth slowing to the lowest among member states of the Organization for Economic Cooperation and Development with its unemployment deteriorating to the worst level since the foreign exchange crisis in the late 1990s.

The Bank of Korea last month slashed its growth outlook for the country’s economy this year to 2.2 percent from its previous forecast of 2.5 percent three months earlier. The revised outlook still looks too rosy, with many private institutions at home and abroad predicting that Asia’s fourth-largest economy will expand far less than 2 percent in 2019.

The implementation of a 5.83 trillion won extra budget approved by the parliament earlier this month is expected to prop up growth by a mere 0.1 percentage point.

Pursuing tax-fueled growth without being accompanied by measures to forge more corporate-friendly conditions would only push the economy further into a downturn.

The Moon administration has increased fiscal spending mainly to create low-paid temporary jobs, pay subsidies to small businesses to help lessen heavier labor costs imposed by steep minimum wage hikes and finance populist welfare programs. At the same time, it has pushed for measures that have dampened corporate activity and market vitality, while remaining reluctant to carry out regulatory and labor reforms.

Unless this misguided approach is dropped, the country would be trapped in the dual problems of fiscal instability and economic sluggishness.

What complicates the matter is the growing possibility of a steep reduction in corporate tax revenue amid worsening business conditions at home and abroad. The combined operating profit of 55 of the country’s top 100 listed firms that announced their first-half earnings fell a whopping 40 percent in the period from a year earlier to 42.8 trillion won, according to recent data from industrial tracker CEO Score.

Affected by an escalation in the US-China trade war and Japan’s export curbs against South Korea, business sentiment here has deteriorated to the lowest in over a decade. The business survey index for August, based on a poll of 600 local firms by the Korea Economic Research Institute, came to 80.7, marking the lowest since 76.1 in March 2009. A reading below 100 means that pessimists outnumber optimists, with a figure above the benchmark pointing to the opposite.

Inefficient and reckless government spending should be curbed to secure more fiscal room to prepare for a full flare-up in external risks.

Stable fiscal management is also needed to keep mounting national debt in check. The debts of central government agencies grew by 35.1 trillion won over the previous six months to 686.9 trillion won at the end of June. The increase far surpasses the rise in national debt for the whole year of 2018 at 24.4 trillion won.