Put growth ahead of welfare

The government has proposed a 358 trillion won ($333 billion) budget for next year. Deputy Prime Minister for Economy Hyun Oh-seok said the government worked hard to come up with a financial plan that can help generate growth, while at the same time meeting the national agenda and goals and holding the line on the deficit.

In fact, the proposed budget underscored the government’s dilemma. It needs to fund steep increases in spending on welfare programs against the backdrop of a slow-moving economy. The challenge is particularly demanding as other members of the Organization for Economic Cooperation and Development all boosted welfare spending when their economies were prospering.

Welfare and growth are contradictory. Increased spending on welfare does not stimulate the economy. The government would have to set aside separate expenditures in order to stimulate growth. Budgeting poses a headache because there are increased spending demands at a time when the outlook is for declining government income.

As a result, the budget proposal is too modest. Because it aims to kill three birds with one stone, it likely will achieve nothing. While trying to save on expenditures, it keeps budgets on big-spending pork barrel projects more or less intact.

The government initially said it planned to scale down social overhead capital spending by 3 trillion won, but the budget calls for 1 trillion won. It feared that reduced public construction projects could hinder recovery. If it is sincere about revitalizing the economy, the government should put off welfare spending for now. Due to its obstinate commitment to fulfilling campaign promises to increase welfare spending, the budget in those fields has surged nearly 9 percent. The government also nevertheless wants to maintain fiscal integrity.

In the end, the proposed budget works against reviving the economy.

But such neutral budgeting cannot last. Welfare spending would only increase and, if the economy does not pick up speed, the fiscal deficit only widen. The government must first think hard about its perspective and direction on finances and the budget, and go back to square one on welfare spending.

Welfare infrastructure should first accommodate the economy to generate productive growth. Social and universal benefits could come after the economy returns to stable, sustainable growth. The private sector should take the lead on economic growth and job creation. And the government should support the private sector through deregulation and liberalization that doesn’t increase public spending. Smart budgeting could help the government achieve fiscal balance without tax increases.