Shaking the fortressThe government’s public finance management has come under question after Deputy Prime Minister and Finance Minister Hong Nam-ki revealed that the national debt could hit a level equivalent to 45 percent of the country’s gross domestic product (GDP). He estimated the national debt at 45 percent of the GDP for 2022 to 2033 in a workshop run by the ruling Democratic Party (DP). His comment suggested more fiscal expansion if the debt share against the GDP — currently under 40 percent — shoots up to 45 percent over the next three to four years.
The number exceeds the Finance Ministry’s estimation of 41.6 percent in 2022, suggesting over-spending of over 70 trillion won ($59 billion). Hong explained that it was the questioner, not himself, that mentioned 45 percent. He only said that when counting supplementary budgets, the country’s debt ratio could become slightly over 40 percent this year.
But given the emphasis on a “stronger fiscal role” from President Moon Jae-in and the ruling party, the government may be prone to stretch the budget over the next few years. During a public finance strategy meeting last month, Moon said a strong fiscal role is needed to address Korea’s imbalance in the jobs sector and strengthen employment security. The Finance Ministry may be tailoring budget policy to the president’s wishes.
Fiscal expenditure comes from tax revenue, prioritized by need. If tax revenue is insufficient, the government must borrow. Korea’s debt ratio against GDP is at 39.4 percent, modest compared to the 111 percent average of the members nations of the OECD. Fiscal integrity is one of Korea’s prized strengths, along with a foreign exchange reserve of $400 billion.
Some argue Korea is too conservative in fiscal management. The International Monetary Fund and other foreign agencies advised the Korean government to bump up fiscal spending to prop up investment and growth during times of stagnancy in corporate and consumer activities. The government has been expanding spending to boost income.
But spending must be done wisely by keeping the fiscal balance up and pushing funding where it is most necessary. It is hard to scale back the budget once it is stretched. More conflicts of interest arise to make a rollback harder. Instead of disputing whether the 40 percent threshold should be the Maginot Line, the fundamental principle of keeping public finance healthy is more important.
The government has been spending more on welfare increases than bolstering growth. Although welfare benefits should be strengthened to address rapid aging and the low birth rate, the government must not resort to reckless generosity without farsighted planning. Korea is a small open economy that can shake at any unexpected external shock. Strong public finance is a fortress against future risk.
JoongAng Sunday, June 1, Page 30