Party’s over for in-debt IncheonOur civil servants are seen as being especially blessed as they don’t have to worry about such trifles as early retirement or overdue wages. However, they experienced an unprecedented case of delayed salary payments in Incheon early this week. Although the emergency was resolved within the space of a day, it vividly illustrates how serious a liquidity crisis our local governments now face.
Incheon city paid thousands of its employees welfare benefits amounting to 2 billion won ($1.77 million) on Tuesday, a day later than scheduled, due to a temporary lack of funds. We are deeply worried about the fiscal health of Incheon because the city, with a whopping 8 trillion won annual budget, could not even afford to pay benefits that would seem to be well within its reach.
The municipal government explained the crisis using the jargon a “temporary mismatch of liquidity.” But alarm bells began ringing from the late 2000s due to the launch of extravagant civil engineering projects such as the 2009 Global Fair & Festival, which led to a 15 billion won deficit after the city spent as much as140 billion won. The touted Wolmi Galaxy Rail, a monorail aimed at linking Incheon Station and Wolmi Station for the festival, remains only partially complete and fully nonoperational after sucking up 86.3 billion won.
Yet Incheon has continued its spending spree. Despite a recommendation by the Olympic Council of Asia that it use pre-existing facilities, the city took steps to build a new main stadium for the Asian Games it will host in 2014, not to mention its hurried construction of a new urban subway line 2 to meet the same deadline. All the hoopla has helped to swell the city’s debt to 3.184 trillion won.
A bigger problem is that a fiscal crisis of this magnitude is not confined to Incheon. According to the latest data from the Ministry of Public Administration and Security, the number of local governments whose debt ratio exceeds 25 percent of their budgets rose to four, with 57 others set to soon join their ranks. When that happens, one out of four local governments will suffer budget deficits.
As such, a number of local governments run the risk of going bankrupt soon. Since Yubari city of Japan declared it would default on its debts in 2006, it has undertaken a ruthless restructuring: Half of its civil servants were laid off, while the wages of the rest were slashed in half; bus fares quadrupled. To avert such a catastrophe in Korea, a desperate restructuring is required.