[OUTLOOK]Economic Policies Must Be Focused

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[OUTLOOK]Economic Policies Must Be Focused

As concerns over the sluggish economy grow, a variety of stimulus measures are being proposed, and most of them are focused on fiscal policy. Without criticizing what other economic commentators are saying about fiscal policies, I am concerned about many assertions that are being made with dubious grounding.

First of all, the government, having traditionally boasted of its sound finances, will not welcome the idea of opening up the state coffers. It looks like it has a lingering affection for its plan to achieve balanced finances by 2003 by reforming the government budget, which went into the red after the 1997 financial crisis. But the government is forced to resort to deficit spending because recovery from the downturn is slow and familiar measures, like interest rate cuts and stock price stimulus, were not effective. The government has been unwillingly pushed to use fiscal policies.

Is there any productive effect if the government employs policies that it really does not want to use? If economic recovery is guaranteed, there is no big problem with recording some deficit in the short term. If the government does not have any conviction that a recovery is coming, it is reasonable for the government to economize on the government budget. But though the government advanced the timing of some of the spending it had already planned during the fiscal year, it showed no real policy intention to move to deficit spending; as a result, it still gives the impression of sticking to budget austerity as a basic policy.

Seoul's method of drawing up a supplementary budget gives me gray hairs. If the government has to expand its budget in this way, it should allot the money with clear guidelines when it draws up the budget plan. Financial policies cannot be effective in an atmosphere in which the government dissipates tax money without being held responsible for slipshod management of the projects it funds.

The first criterion for adopting a policy is effectiveness, and then we have to look at the opportunity cost of the policy. It goes without saying that we have to consider the limits of financial capacity and economic reality when we evaluate policies. Looking at recent discussions on government finance, there are many arguments that have lost their way. It is ridiculous for policymakers to expect that rabbits will be caught automatically once a net is pitched. But it is more ridiculous to predict, without distinguishing between a deficit caused by slow business activity and a deficit caused by ill-calculated budget planning, that expanding government spending will lead to a healthy economy. Some persons have cited the time lags involved to explain why financial policy has been ineffective. Others claim that tax cuts will be more effective than expanding spending, citing the case of the United States. But we live in Korea where the market is not as stable and economic techniques do not always work in the same way. Because the government will be pressed to spend more money for bailouts and social safety nets, it is dangerous to employ income tax or consumption tax cuts; they can cause our finances to deteriorate rapidly.

Taking these factors into consideration, there is a limited number of options we can choose as financial policy measures. Though the government can mull over short-term additional spending to lift the business climate, it should know that it cannot expand such expenditures without limit. If fixed allocations like interest payment and welfare disbursement are set aside from the budget, the portion of the budget available for such discretionary spending is not very great. In addition to such limits, structural expenditure items like corporate restructuring will put more of a burden on state finances.

After all, it is difficult for us to expect that tax cuts or more spending will prove successful without any fundamental change in economic conditions. I don't mean that the government should renounce its current policies, but I do mean that the government should comply with procedures in place to make sure its spending policies will be effective. Expanded spending will be harmful rather than helpful if Seoul does not pay attention to reducing the nondiscretionary portion of the budget - like reducing debt to reduce interest payments - and to increasing the efficiency of its spending. Before helping companies with tax cuts, the government should make investment more attractive by deregulating the private sector. When the market is unstable due to protracted restructuring, few people would increase their spending after tax cuts.

What consumers and businessmen long for is assurances that our economy's future is bright. Who on earth will trust the government if it proposes sloppy policies when its economic credibility is gone? But if the government changes what should be changed, who will complain?


The writer is a professor of economics at Ewha Womans University.

by Chun Chu-song

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