Reforms are the answer

Since Korea’s democratization, the government’s fiscal capability was never taken into account by presidential candidates and presidents-elect. They were all intoxicated by the rosy idea that the government would have enough money when the economic growth rate was recovered or that the country had no fiscal challenge to begin with. Until the presidential inauguration in late February, a president-elect and his or her team usually didn’t face the issue directly. When the president completed appointments and designed a national agenda with new passion, the fiscal limits finally emerged like an enormous mountain in front of a speeding vehicle.

The administration, then, confronts the challenge of fiscal capability. Usually it wants to fulfill its campaign promises without angering the people with a tax hike. The temptation is to spend money now at the expense of future generations. When a president ends the five-year term and a new administration is launched, the secret is revealed that the temptation was a trap that caused a national crisis.

To end this practice, the Park Geun-hye administration announced a specific roadmap for how to implement her pledges. During her five-year presidency, Park promised to raise 135 trillion won ($122.9 billion) by restructuring annual expenditure to secure 75 trillion won and increasing tax revenues by another 60 trillion won. Her framework of more welfare benefits was based on this plan.

But a serious challenge was seen as soon as her presidency was launched. First, the government realized a serious problem in the revenue in the government expenditure plan and the 2013 budget plan created by the previous administration. The tax revenues and non-tax revenues were unrealistically high. The Park government, therefore, created an urgent supplementary budget of 12 trillion won.

The second challenge is the Park government’s determination to reduce the debts of the state-run companies. In previous administrations, unreasonable practices were often committed by state-run firms. In the Kim Dae-jung administration, the 10 major public companies carried out projects worth 20 trillion won, and during the Roh Moo-hyun government, 120 trillion won worth of projects were done by the companies. In the Lee Myung-bak administration, public companies carried out 160 trillion won in projects.

Ending this addictive cycle is no different from reducing expenditures. Park’s plan to carry out her pledges, therefore, was revised to lower the appropriation of tax revenues by up to 35 trillion won annually. This means the resources raised through various method of tax revenues will be used to fill up the deficits.

And almost no additional fiscal expansion was carried out. Taking into account the abnormal practices using the public companies, the Park government actually reduced about 30 trillion won of annual expenditure.

While the basis of her plan has been kept, the scope of it is still facing various uncertainties. Tax reform including reducing tax exemptions and benefits, cracking down on the underground economy and taxing businesses and increasing taxes on financial incomes were tasks that were long overdue, but the Park government is facing a new temptation of a tax hike. Because the actual fiscal capability has been reduced, the government became more desperate.

In an industrial, developed country, certain individuals related to certain industries, companies, jobs and regions were protected. But a welfare state protects the general public. How can we create the expenditure structure of a welfare state without a great conflict with our past and present?

The task of our time is not just about making a choice between paying more for more welfare benefits or paying less for fewer welfare benefits. We have more complicated and difficult issues.

Making the easy choice of a tax hike absolves us from carrying out reforms. Without determination, it will be hard to even take the first step of tax and fiscal reform. Welfare policy should follow the tax and fiscal reform.

Translation by the Korea JoongAng Daily staff.

*The author is president of the Korea Institute of Public Finance.

by Ock Dong-seok