The Korea Herald

피터빈트

Fiscal plan inadequate to cover welfare spending

By Korea Herald

Published : Aug. 17, 2016 - 17:46

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Finance Ministry officials have suggested the national budget will exceed 400 trillion won ($364 billion) for the first time next year, while reassuring the state debt will still be held below 40 percent of gross domestic product.

A senior ministry official said last week the 2017 budget would increase by more than 3.5 percent from this year’s 386.4 trillion won to hover slightly above the 400 trillion won mark.


The official, who spoke on condition of anonymity, added that, despite the planned increase in fiscal spending, it might be possible to keep the national debt to GDP ratio in the 39 percent range.

The figure, which remained at 34.3 percent in 2013 when President Park Geun-hye’s administration was installed, is projected to rise to 40.1 percent in 2016. Submitting an 11 trillion-won supplementary budget plan to the parliament last month, the Finance Ministry said the national debt to GDP ratio might be down to 39.3 percent.

Behind financial authorities’ confidence that an expansionary budget will not further undermine fiscal soundness is a continuous increase in tax revenues.

According to government data, national tax revenues rose by 19 trillion won from a year earlier to 125.6 trillion won in the first half of this year. The amount accounted for 56.3 percent of the annual revenue target of 222.9 trillion won.

Corporate, income and value-added taxes were collected more than expected due to improved profitability of companies, a boom in the real estate market and an increase in private consumption.

Finance Ministry officials say the increase in tax revenues enables them to minimize the issuance of state bonds and repay part of the existing government debt.

South Korea’s national debt as a percentage of GDP may not seem high compared with other members of the Organization for Economic Cooperation and Development. The country’s national debt to GDP ratio of 37.9 percent in 2015 was far lower than 230 percent for Japan, 113.6 percent for US and 78.7 percent for Germany.

What is worrisome is that Korea has been seeing its national debt rise at the fastest pace among major economies in recent years and this trend is seen to accelerate in the coming decades.

In its long-term fiscal outlook released last year, the Finance Ministry warned that the debt ratio could surge above 90 percent by 2060 if new spending programs were put in place amid a slowdown in economic growth.

In a bid to secure fiscal soundness over the long term, the ministry last week disclosed a draft bill that would make it compulsory for the central government to keep debt below 45 percent of GDP and set the ceiling for the annual budget deficit at 3 percent of GDP.

Critics raise doubts about whether such fiscal targets will remain within reach down the road as the draft law leaves room for the government to go beyond the spending limit when the economic situation worsens.

This consideration may be necessary to prevent the economy already stuck in a low-growth rut from being dragged deeper into recession.

What is more worrying for experts is a lack of concrete measures to finance expanded welfare programs, which they note will make the government’s fiscal scheme unviable in the long run.

In a recent meeting with reporters, Vice Finance Minister Song Eon-seok dismissed concerns that welfare spending would be reduced to meet the fiscal requirements.

“The government will remain committed to adequate expenditure on welfare,” he said.

But he fell short of suggesting credible measures to fund an expanded set of benefit programs, the cost of which will increase rapidly due to an aging population and a low birthrate.

According to OECD data, Korea’s welfare spending to GDP ratio remained at 10.4 percent in 2014, less than half of the OECD average at 21.6 percent.

Experts note it may be too complacent for government policymakers to expect tax revenues to continuously increase to shore up their long-term fiscal scheme. Corporate profits may decline amid the prolonged economic slump and private consumption and real estate deals are likely to dampen as stimulus measures run out of stock.

Experts say serious consideration now needs to be given to raising taxes to meet rising welfare demand while keeping fiscal health.

“What is urgently needed is a way to ensure a stable and substantial increase in revenues rather than an adherence to fiscal rules,” said Oh Gun-ho, who leads a civic group devoted to building up a welfare society.

The administrations of President Park and her predecessor Lee Myung-bak have opposed increasing taxes, arguing the measure would hamper efforts to reinvigorate the economy. However, experts say that it is time to discuss overhauling the taxation system to increase revenues in a way the additional burden will be shared by big corporations, the rich and a larger proportion of wage earners.

By Kim Kyung-ho (khkim@heraldcorp.com)