[Outlook]Fast action vital in crisisThe Bank of Korea yesterday slashed its key interest rate by 0.5 percent, from 2.5 to 2 percent. Although analysts had wondered whether the cut would be a quarter or half a percentage point, the decision was not far from the general expectations in the market, considering the dire state of the economy.
The central bank had initially hesitated in making a move before Lehman Brothers went bankrupt in the fall, as the crash of the financial titan happened so abruptly and unexpectedly. It is an amazing change that the BOK has lowered the benchmark rate from 5.25 percent to 2 percent in just four months since it started cutting it in October last year.
Financial policy is an important axis in times like these. The new economic team was launched this week, making it clear that the recession is taking place at a faster speed than expected and underlining the necessity of a supplementary budget. Economic indexes such as exports, investment and consumption have been plunging.
Although some have different ideas, most countries admit the necessity of expanding state spending to make up for the shortage of demand. Our government also plans to calculate which fields need state money and how much, and will confirm the final decisions by next month.
There is a general consensus over the necessity of a supplementary budget, but such plans still face myriad opposition. First, opponents point out that this year’s budget hasn’t been implemented completely. This year, it is said the budget is being implemented faster than before, but it can take some time before such speed is felt on the ground.
So should we decide what to do after we figure out all the variables? This is probably the right way to go about resolving most problems, but under the current circumstances, if we wait, it may be too late.
How about the argument that we first need to think about where to spend the budget? This argument is based on the suspicion that half the central or local governments that request money are thieves. There has to be a certain amount of merit behind this bad reputation.
But this problem only reminds us that accounts have been settled carelessly. Of course we should be careful to keep our finances sound and healthy, but it’s the government’s duty to expand state spending in a crisis like this.
Our finances are much healthier than many advanced countries. It is worth noticing that Korea has retained a surplus, looking at the balance sheets so far. Last year, despite the economic meltdown, the government had a 4.6 trillion ($3.23 billion) net surplus in the budget. Taking into account tax cuts worth 9 trillion won, the volume would exceed 10 trillion won. Although this year’s supplementary budget hasn’t been confirmed yet, up to 20 trillion won can be drawn on if we make it clear where it will be spent.
For instance, basic taxation, including value added tax, won’t be revised. Taxes will be reformed with a view to bettering the system, not to cope with the economy, and the net budget surplus that we earn in the future when the economy improves will be used only to redeem government bonds.
The idea of drawing up a supplementary budget when it becomes absolutely necessary is valid when sudden natural disasters take place. In a crisis of the national economy, however, it is good to draw up a supplementary budget earlier and adjust the schedule by which government bonds are issued in order to cope with the hostile climate.
In the late 1990s, a financial crisis swept Asia. In Japan, several established financial houses collapsed. As the Diet hesitated to draw up a supplementary budget because of its shaky financial situation, the country’s economy worsened over the next several months. As a result, a larger supplementary budget had to be created. Japan later reflected that several months’ hesitation made the economic slowdown in Japan linger for around a year.
It’s not easy. Few question the necessity of a supplementary budget, but debate rages over where it should be used, and how much is needed, for how long. The new economic team should present a draft and the National Assembly should look into the plan.
But the Assembly must be able to see the bigger picture. If there are limits in the National Assembly’s ability to make judgements, central or local governments must clearly reveal how they will use the money and what effects they expect. The results must be strictly evaluated by the special committee on budgets and account in the Assembly, or another special sub-organ of the Board of Audit and Inspection. If any intentional irregularities other than inevitable changes in circumstances are found, administrative and judicial responsibility must be taken.
*The writer is a senior columnist of the JoongAng Ilbo.
by Park Tae-wook