Fiscal surgery or future ruinThe National Assembly Budget Office has issued a bleak outlook for public spending, showing how the impact of extravagant welfare policies will impact future taxpayers. By 2060, the office claims the national debt will hit a whopping 218 percent of Korea’s GDP, beating Japan’s 230 percent. According to its prediction, a child of 10 today will have to pay 320 million won ($277,000) more in taxes than the financial benefits they will receive from the government during their lifetime. If Korea keeps aging at its current rate, and adopts measures to sustain today’s high standards of living for elderly people, it will face the same kind of fiscal mess down the road as Greece, Spain and Japan are looking at now, it said.
By way of a solution, the report advises the government to spend less and collect more tax revenues before it is too late. It calls for strong fiscal and pension reforms, and suggests working to shrink the rate of the working population that is exempt from national taxes to 9 percent, down from 14.4 percent at present. It also urges raising the rate of value-added tax from 10 percent to 12 percent by 2018. Another measure that is required, it argues, is to ramp up the size of national pension contributions by over one-third by 2025. The problem is the public does not want to hear such austere prescriptions, meaning that they would have to be ordered from above.
Apart from encouraging sharp growth in the birth rate, there is no fundamental way of solving the problems posed by a rapidly aging society. Furthermore, the situation presented by the report is not even a worst-case scenario, and if politicians keep rolling out populist welfare campaign promises, the results could be catastrophic and fiscal ruin closer at hand. The report warns that the government will not be able to sustain its spending due to the snowballing deficit that is shaping up under its current revenue structure.
Korea must learn from the mistakes made in Europe and Japan and establish strict fiscal guidelines to avoid falling into the trap now swallowing up the euro zone, which is belatedly calling to establish a closer fiscal union. We need an annual cap to prevent the fiscal deficit and public debt from exceeding a certain level. Japan has paid a heavy price by trying to tighten up after years of profligacy. We should also keep populism at bay. If we do not start our fiscal diet today, future generations will be buried in debt.