[OUTLOOK]Beware those extra budget items

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[OUTLOOK]Beware those extra budget items

Contradictions surround next year's budget, which amounts to 111.7 trillion won ($93 billion). The government boasts that it has balanced its books after the financial crisis in 1997, but there remain voices of criticism. The prospect of economic growth is unclear and yet the budget is too austere, some say. Others show discontent over the average tax of 3 million won that one person will have to pay for a government they claim hasn't done much. There are also those who feel the sudden prominent increase in welfare and education investments is merely pork barrel spending before a presidential election. Some even claim that the present administration has no business deciding the next administration's budget.

I rarely have nice things to say about the government budget, but this time I am on the government's side. Is this because I think the government budget is flawless? No, not in the least. To cover all the faults in this budget I would need to write a thesis. Yet the same faults pertain to last year's budget and to the previous year as well, and should there be no changes made to the existing budget system, next year's budget will carry the similar problems.

Exemplary suggestions such as fortifying the accounting function of the budget, correcting funding problems and special accounts, and enhancing the efficiency of budget procedures have always been around.

There has merely been a lack of determination and capability to act on these suggestions, and this is what has caused the troubles to drag on.

The one difference between this budget and those of the past is that this year the government has declared that it will not issue deficit-covering bonds in general accounts.

Some might wonder what the big deal about this is when there isn't to be a large deficit anyway. In my opinion, this decision by the government to shackle its own ankles will be the core of next year's budget.

A conservative budget right now would do more good than harm. After all, we were saved from the worst during the financial crisis because our more or less stable financial foundation allowed us to go with a deficit budget and mobilize resources for restructuring.

However, our finances can't be completely healthy when we have to worry about the redemption of public spending, the financial imbalance of the social insurance system and the costs of a potential unification. Also, an uncertain economy could mean that a discretionary budget policy could destabilize the economy even further.

Yet one of the biggest factors that harms financial regulation is the list of additional budget items that occur each year. Naturally, such a possibility makes it easier for moral hazard to occur during the compilation of the main budget or during its actual implementation. We witness flood damage nearly every year and yet during the deliberation of the budget the reserve fund for flood disasters shrinks, while regional budget projects seem to increase.

If there aren't any assurances of additional budgets to fall back on, the government would try to use its allocated resources more thriftily and its productivity would also go up. Furthermore, the compilation of additional budgets weakens any macroeconomic measures to readjust finances. Because the effect of a financial policy becomes apparent only after some time has passed, the calculations of the budget must be accurate.

What's to come next year? The government, having declared that it will not issue deficit-covering bonds, will find difficulty in proposing any additional budget items except in emergencies. There would also be more supervision of the budget by economists and civic groups.

Normally, it is the current administration that wants a bigger budget and the legislators, as the representatives of the people, who try to restrain the budget. Yet in Korea it seems as if it's only politicians who want to spend, and then spend some more. We have yet to wait for the results, but the government for now gains points for declaring that it will stick to the financial regulations.

Of course, this does not mean that we can't allow flexibility to maintain the healthy budget and to absorb any external shocks in our finances. Inevitable causes of a deficit in case the economy worsens need to be attended to properly, and overdoing the austerity could choke any potential growth elements.

Being on guard against any structural deficit or discretionary expansion doesn't mean that we shouldn't attend to short-term deficit elements.

While there are countless other things that the government could do to further improve its budget, the government would be doing more than enough should it not compile any additional items next year.


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

by Chun Chu-song

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