South Korea’s economic situation is worsening. Last week the Bank of Korea revised its economic growth for this year down sharply to negative 1.3 percent.
It is true that the government’s fiscal role has become important in kick-starting the pandemic-hit economy. But equally important is the efficient use of its budget.
If it splurges on nonessential or populist programs under the pretext of reviving the economy, growth momentum will vanish.
In this context, the “expansionary fiscal position” for next year, agreed upon last week by the government and the ruling party, is concerning. Based on the position, the 2021 government budget is likely to be the largest ever. But there are no policies in sight to deal with the adverse effects of a super-large budget expected to swell to 560 trillion won ($47.3 billion) from 512 trillion this year. Considering the negative growth projection, the government will not be able to fund the budget with tax revenue alone. Heavy borrowing will be inevitable once again.
Korea’s national debt is already piling up with vertiginous rapidity. This is a result of the expansionary fiscal policy pursued by the administration under President Moon Jae-in. It has expanded its budget sharply each year. When tax revenue was insufficient, it did not hesitate to borrow through bond issuance.
Its fiscal deficit widened to a record 110.5 trillion won in the first six months of the year. The figure is poised to surge from 660 trillion won in 2017 to 840 trillion won this year, and surpass 1,000 trillion in two years.
Korea’s government debt-to-GDP ratio, a measure of fiscal soundness, is a close call. The ratio is projected to rise from 39.8 percent early this year to 43.5 percent at the end of this year. Global credit appraiser Fitch Ratings warned that if the ratio goes up to 46 percent in 2023, it could exert more meaningful pressure on Korea’s sovereign rating.
There is a view that Korea is still fiscally sound compared with other countries. But simple comparisons, particularly with key currency countries, can be misleading. Korea is heavily dependent on international trade, so it is likely to post a current account deficit easily due to volatile external variables. More than that, if debt held by many public institutions and enterprises were factored into the equation, the ratio would surpass 100 percent, according to the Korea Economic Research Institute. Korea’s national debt is never an issue to take lightly.
When the economy is in trouble, it is right to assist the economically vulnerable as a high priority. But if a budget is too lopsided toward welfare or spends money inefficiently, it may stunt economic recovery and growth.
Some items do not look indispensable at this challenging time. Among them is a plan to make high school education free for all, starting next year, a year earlier than previously arranged. Critics question whether the government and the ruling party expedited this plan because of the presidential election in early 2022. This does not look so unfamiliar. Ahead of the general elections this year, they exempted regional infrastructure projects from preliminary feasibility tests despite criticism that doing so might lead to the wasteful use of taxes.
Given economic difficulty and decreasing tax revenue, it is necessary to review a controversial plan to extend unemployment insurance coverage to about 470,0000 freelancers. They are not required to have insurance against unemployment. Of course, they will welcome this measure, but there is controversy over whether they will be able to keep paying premiums as certainly and regularly as salaried employees. There are concerns that this plan may quickly drain the reserves.
It is a government’s duty to spend fiscal resources as efficiently as it can. Nonessential items must be eliminated. If expansion of the budget is inevitable, the government must present the people with a road map on how to reduce fiscal deficits. It is the least the government owes taxpayers.