[VIEWPOINT]Prepare Budgets for Long-Term Benefits

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[VIEWPOINT]Prepare Budgets for Long-Term Benefits

The recently proposed government budget for 2002 focuses on reviving the economy, enhancing potential growth and strengthening the social safety net. The total budget amount is 12.3 percent higher than this year's preliminary spending plan.

Next year's budget proposal assumes an economic growth rate of 5 percent and an inflation rate of 3 percent. It is based on projections of an 8 percent increase in tax revenues and also a nominal growth rate of 8 percent. The government budget is likely to be labeled expansionary because it will exceed the economic growth rate by more than 4 percentage points.

Of the government budget's 13 categories, infrastructure, housing, support for agricultural and fisheries communities, national unification, and foreign affairs and national defense are the spending segments that grew slower than the economic growth rate.

In fact, the growth rate of the budget for supporting the agricultural and fisheries communities is lower than that of the economy because the budget for 2001 in this sector was increased substantially to pay for household debt reduction and reduction of the fishing fleet. Expenditures for infrastructure and housing projects increase 13.3 percent when private sector investment is included.

The budgets grew rapidly, in particular for social welfare (18.6 percent), science and technology (15.8 percent), public funding and interest payments for the national debt (14.2 percent), education (11.5 percent), and payroll (9.9 percent).

An expansionary budget could revive the sagging economy in the short term. Yet, in terms of the business cycle, questions remain on whether the timing is appropriate to prime the economy next year. Due to factors inside and outside Korea, an accurate forecast of changes in the business climate next year is difficult to make; but a forecast of an economic upturn starting in the second half of next year is a reasonable assumption.

The government, in fact, assumed that the real growth rate of the economy next year would be 5 percent when calculating the budget, a figure that indicates sound growth.

Therefore, the government needs to reconsider if it really needs to expand next year's budget by the amount indicated to revive the economy.

Considering the current condition, a large budget increase at this point is not wise. In 2002 , the government will have to pay 10 trillion won ($7.66 billion) in interest on government bonds and assistance to financial firms.

In addition, nearly 6 trillion won of restructuring bonds will mature next year, and, in 2003, bonds of almost 22 trillion won should be redeemed.

Medical insurance corporations are in financial trouble and the four major public pensions, including the National Pension Corporation, have fallen into the structural trap of problems associated with perennially low premiums but high benefits.

Under the current circumstances, the government would damage the stability of the nation's finances and harm the foundation of long-term economic growth by adhering to short-term pump-priming measures and expanding budgets.

Local elections and the presidential election, scheduled to be held next year, also have significant meaning in budget management. Breaking with the practice of past administrations, the government should never allocate budgets only to provide political benefits to certain parties or factions. The government should be careful not to launch unprofitable large scale investment projects or expand consumption-oriented welfare spending.

Expenditures on social welfare and education should be increased on a long-term basis, but moderately. While the economy grows at 5 percent, a budget for social welfare growing at 15.6 percent invites criticism of excessive spending, even for the plausible reason of establishing a viable welfare system. Preparing budget proposals that provide practical benefits to national development and the people's welfare is more important than coming up with plausible justifications for unwise spending.

We count on the National Assembly to debate the budget proposal appropriately.


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The writer is a professor of economics at Yonsei University.

by Yun Kun-young

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