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Unfettered fiscal expansion

Published: 17 Aug. 2021, 19:18

The Korean economy is losing steam fast. The highly experimental income-led growth policy has wreaked havoc on self-employed businesses. The middle class has thinned and a wealth gap widened despite the government promise to prioritize the lives of the people and jobs. The Covid-19 crisis worsened the economy. From 2017 to 2020, the economy grew 1.63 percent, the worst performance under any president.

Spending, however, was high. Government spending rose 8 to 9 percent annually. Last year, tax revenue shrank on reduced corporate income from excess regulations and Covid-19. The Moon Jae-in administration raised nearly 100 trillion won ($86 billion) annually through debt issuance since 2019. National liabilities that stood at 600 trillion won before Moon took office in 2017 are expected to hit 1,070 trillion won next year when he leaves office.

Government spending for 2022 is expected to exceed the 600-trillion-won milestone. The Ministry of Strategy and Finance finalizes the budget draft for next year within the month to submit for a legislative review on Sept. 3. The budget plan is expected to top 600 trillion won next year, given the ruling party’s push for two extraordinary budgets this year. Including two supplementary budgets so far this year, the amount has already reached 604.9 trillion won, 18.1 percent higher than the original spending plan of 512.3 trillion won.

Unless the government shifts to tightening, next year’s budget will be greater than this year’s. The Finance Ministry originally hoped to contain the budget under 600 trillion won, but cannot challenge the ruling Democratic Party (DP) which wants to keep the expansionary fiscal policy ahead of the March 9 presidential election. The DP raised four supplementary budgets last year to dole out relief grants after Covid-19, even as the government’s debt-to-GDP ratio is expected to exceed 50 percent next year. Fiscal balance improved from last year due to tax revenue excess from a surge in capital gains tax from the asset market boom, but the asset fad could fizzle out when interest rates go up.

Despite the debt-financed spending, people’s livelihoods have not improved. Due to sky-high housing prices, young people cannot dream of owning a home. Presidential candidates from the DP all vie to increase government spending and social benefits. The reckless spending spree must come to a stop for the sake of the country’s future and younger generation. The 600-trillion-won Maginot Line must not be crossed.