Tax hikes are not the answer

The debate over expanding welfare benefits has heated up recently. The Blue House and the ruling and opposition parties, as well as local governments and education offices, are mudslinging over the policies. The governor of South Gyeongsang has declared that the provincial government will not create a budget for free school lunches, while the education office heads said they will not allocate money for the free day care program. Local government chiefs also held a press conference and announced that they will be forced to declare welfare default unless the central government expands its financial support.

As the situation worsened, the head of the main opposition party proposed to form a consultation body to come up with a grand compromise on a tax hike as soon as possible.

It is my personal opinion that tax rates should not increase to implement welfare pledges made in the last election. Tax hikes will inevitably slow down the economy’s recovery amid the government’s desperate efforts to speed it up. It’s like stepping on the car’s brakes and accelerating at the same time. Japan has implemented an expansionary monetary policy, but recently its economy has regressed into a recession due to its consumption tax hike. Abenomics, therefore, is facing a crisis with no exit point. We must learn a lesson from this.

In the long term, a tax hike at this point is not wise. Korea, among the Organization for Economic Cooperation and Development (OECD) economies, is experiencing the fastest aging rate and a severely declining birthrate. As a result, expenditure for welfare benefits has rapidly increased while economic growth has slowed.

If the current system remains, spending for the welfare program will increase to 12.7 percent of GDP by 2020, 22.7 percent by 2040 and 28.8 percent by 2060 from 9.6 percent in 2013, according to the Korea Institute for Health and Social Affairs. Under these circumstances, delaying the discussion on tax hikes will be a way to save Korea from falling into the trap of advanced countries where they shoulder high burdens for larger benefits.

Another reason to refrain from discussing a tax hike at this point is that the welfare programs in question have problems. Korea has maintained the balance between economic growth and development in social and welfare programs until recently because past administrations have maintained reasonable welfare policies within their economic capabilities.

That practice, however, collapsed when the country went through the last local, general and presidential elections. The free school lunch program, free day care program and the high-price college tuition are key examples. The mutual point they share is that they are relatively ineffective for their astronomical fiscal requirements.

The welfare programs are, in fact, policies consistently promoted by the Democratic Labor Party. During the last presidential election, the Democratic Party borrowed the idea to hold on to the welfare initiative and the Saenuri Party actually expanded it, making them official government policies now.

Yet the basic pension is now being paid depending on beneficiaries’ economic conditions, and the government has recently been talking about reforming the debt-ridden public servants’ pension. Under these circumstance, pushing forward a tax hike in order to maintain policies that are already full of problems is a shortcut to inviting a fiscal crisis.

The wisest thing to do at this point is to create a new welfare strategy. When President Park Geun-hye was a lawmaker, she presented the idea of providing welfare benefits “tailor made” for each age group’s needs. To realize this, the Framework Act on Social Security was largely amended to establish a delivery system for welfare benefits and guarantee the sustainability of welfare finance.

I recommend that the Park government go back to its initial intention for welfare policy. This needs to start with overhauling the current policy platform in order to limit the concept of free welfare benefits to only the low-income class, while others will receive tailored welfare benefits with improved services.

Furthermore, establishing the welfare-employment system to provide tailor-made welfare services more productively, a key pledge of the Park administration, must speed up. The delivery system’s revision has been bogged down by the selfishness of the ministries. The project has remained as a stopgap measure instead of providing a fundamental solution as a result.

If necessary, a bold measure such as merging the government welfare and employment ministries must be taken to create an administrative system in which an integrated service will be created. A byproduct of this is that there will be enough manpower recruited to support the project before Park’s presidential term ends.

The kind of welfare program in which a government collects more tax money to provide larger benefits became obsolete and ineffective in the era of globalization and low economic growth. Skepticism is high about whether this can be sustainable in the future.

Today, welfare policies must be linked to employment and implemented according to economic growth. In order to push forward a welfare project, the spirit of social entrepreneurship and the concept of social finance must be introduced to open a new era of welfare, where the principles of management are applied to some extent. The government and political parties must not create an organ to reach a grand compromise on a tax hike. They must create a special team to create a plan to build a creative welfare country.

JoongAng Ilbo, Nov. 13, Page 33

The author is a former welfare minister.

by Suh Sang-mok