The spending conundrumTop economic officials are warning of a South Korean version of the fiscal “cliff” the United States faced at the end of 2012 in their campaign for a supplementary budget. They indicated at least 12 trillion won ($10.8 billion) in extra funds will be needed to be raised by the issuance of government debt. The government’s sharp lowering of this year’s economic forecast to 2.3 percent growth and senior presidential secretary on economic affairs Cho Won-dong’s unprecedented press briefing may have all been orchestrated as a part of a pitch to raise debt.
One of the easiest ways for the government to stimulate the economy and make up for tax shortages is through issuance of treasury bonds. Government officials shouldn’t have scared the public and shocked the markets by referring to a possible fiscal cliff, which has the ring of economic and fiscal gloom and doom. Although a supplementary budget is probably inevitable, the economy is not in a crisis as the national finance law allows budgetary increases when the economy contracts for the second consecutive quarter or at times of natural disasters or massive layoffs.
But there are no other effective means to kick-start the economy, which has been generating little growth for the last seven quarters in a row, and finance the growing demand for more welfare. The government should be able to lay out the buffers and restore the soundness of public finance after incurring the second largest-ever government debt issuance, which is tantamount to over 1 percent of GDP.
We can understand the government nixing the option of a tax hike. The economy could fall into deeper depression if taxes are raised during bad times. But it should also be prudent about issuing debt. To fulfill President Park Geun-hye’s campaign promises on welfare benefits, the government will need 27 trillion won a year. How will it get it by next year after raising 12 trillion won this year through debt issuance? Without breaking its self-inflicted taboo on raising taxes to fund welfare increases, the government could face fiscal catastrophe and be tempted to issue more debt.
The government should first make a new shortlist of its priorities. It must cut back on unnecessary expenditures before resorting to issuing debt. It should come up with an outline of its public finances to maintain fiscal integrity up to the end of Park’s term in 2018.
The president won’t be able to deliver her campaign promises of welfare increases under the current economic slowdown and resistance to tax hikes. It must face the music and confess its conundrum to the public. It should either persuade the people to lower their expectations on welfare benefits or campaign for tax hikes regardless of the political risks. Both moves require boldness. But the country can also face a Greece-like fiscal crisis if it goes on widening its deficits.