Targeting growth potential

South Korea’s national debt has ballooned to more than 40 percent of its gross domestic product. The debt-to-GDP ratio is moderate compared to the average for other members of the Organization for Economic Cooperation and Development, but its growth is alarming. Experts are advising rationalization of welfare spending to improve public finances. But others say an overly conservative fiscal policy could exacerbate the country’s economic slowdown.

The primary object of fiscal policy is to support the economy when it is in downturn to reverse its direction. When the economy sinks, factories can stop and people can lose their jobs. The pain falls most heavily on the working and middle class. If the Korean economy decelerates and slips into a slump, it could be sucked into a deflationary cycle like Japan. Authorities must do all they can to prevent the economy from receding.

The second goal of the fiscal policy is to strengthen the economy’s growth potential. Companies must be able to turn out better products and services in order to stay in the global competition. Competitiveness is essential at a time when the global economy is mired in a prolonged slowdown due to soft effective demand. Without stable growth potential, living standards cannot improve and the younger generation has no hope in the future.

The third role of the fiscal policy is to upgrade living standards and redistribute income. The government must levy higher taxes on the rich and big earners to help the lower class live better through social welfare benefits.

Welfare must not be wasteful, but work to effectively improve lives. The people capable of working must be able to work and get social benefits so that the economy can continue to grow, improving welfare and creating jobs.

Economic recovery, growth potential and a working welfare must go hand in hand. If the economy backtracks, growth potential will be damaged. If the economy loses potential to grow, any growth could be illusionary and temporary. Only when the economy continues to grow can it sustain welfare benefits. Welfare programs that mostly serve as showpieces will do more harm than good.

All this comes down to money. It would be great if the government can go on expanding fiscal spending without collecting more taxes to promote growth and welfare. But that would come at the cost of increased deficit in public finances. The government is doing exactly that. Because it continued with debt-financed expansion to revive the economy, national liabilities are snowballing. Korea’s national debt is expected to exceed 40 percent against the GDP. At current growth pace, the economy won’t be able to sustain debt load in a few years.

If funds are lacking, spending should be rationalized so that it goes into areas that can promote the economy, growth potential and work. Spending should be prioritized in research and development, industry, work, and education. Investment in research and development could immediately boost the GDP and help raise competitiveness in industrial products and services. Talented young people could have more job opportunities in
research.

Spending in the industry could accelerate the government’s campaign to retool the industry to next-generation technology. Instead of appropriating business opportunities randomly to small and mid-sized companies, the government must try to dig up hidden champions that can turn out globally competitive products and promising start-ups with strength in research and development.

Spending to increase jobs will not only help put rich human resources into good use but can also raise household income and consumer spending. Investment in public education is essential to build human resources and create a fair society.

Last but not least, the government must always specify ways to raise funds to ensure integrity in public finance. It is important to draw up good budgeting practices to prevent waste and uncover unregistered economic activities to increase tax revenues, but these efforts cannot alone sustain increasing budgetary demand. If a tax hike is really necessary, the government should try to persuade the people of the need.

Translation by the Korea JoongAn Daily staff.

*The author is a research fellow at Hyundai Research Institute.

by Lee Joon-hyup