Today’s debt is tomorrow’s tax
The author is a finance team editor of the JoongAng Ilbo.
John Maynard Keynes once wrote to his friend George Bernard Shaw, “I believe myself to be writing a book on economic theory which will largely revolutionize the way the world thinks about its economic problems.” And his prediction was right. “The General Theory of Employment, Interest and Money” was published in 1936. Here, he argued that valid demand could be created by increased government spending, and the economy could be boosted. Since then, Keynesian theory has become the golden rule for governments fighting economic slumps.
Korea, which is faced with an economic slowdown, is not the exception. As the economy contracted by 0.4 percent in the first quarter, the government increased spending, and the economy grew by 1.1 percent in the second quarter. The government spending created growth of 1.3 percent, making up for the 0.2 percent negative growth in the private sector. The government has used money as much as possible. In the first half, the central government’s budget execution rate was the highest-ever, at 65.4 percent, or 191 trillion won ($161.3 billion).
The government may feel that it is still short and wants a supplementary budget of 6.7 trillion won. The problem is the funding source that is drying up. The aggregate tax revenue from January to May declined by 1.2 trillion won compared to the previous year. Unlike in the 2016 to 2018 period, when a supplementary budget was drawn up based on expected tax revenue, more than half of the supplementary budget — or 3.6 trillion won — will come from issuing government bonds this time.
I am worried about growing government spending. Raising more tax revenue or issuing government bonds to increase spending and boost the economy could discourage the recovery of the private sector. It is the so-called “crowding out effect,” where the government pushes out the private sector. Household and business demand and investments could decrease, while the efficiency of government spending is lower than the private sector.
According to David Ricardo’s equivalence proposition, today’s debt is tomorrow’s tax. An economic boost using public debt is an expensive tax bill. While government’s power is needed to revive the economy, too much is as bad as too little. The priority is creating conditions for the private sector, including the corporate sector and households, to recover.
JoongAng Ilbo, July 29, Page 31