Recovering fiscal integrity

The government has shifted to “balanced” fiscal policy to roll back from record fiscal expansions over the last five years. Under the first budgetary outline of the new government of President Yoon Suk-yeol, next year’s spending has been proposed at 639 trillion won ($474 billion), up 5.2 percent from this year’s original budget. But if two supplementary budgets for this year are included, next year’s spending would decrease 6 percent from this year. That marks the first fiscal cut in Korea in 13 years.

Alarms have been raised for public finance. Fiscal spending ballooned under the past Moon Jae-in administration after the Covid-19 outbreak. As national liabilities topped 1,000 trillion won, the government debt-to-GDP ratio soared to 50 percent. Excessive liabilities can burden the future generation. The government is right to normalize fiscal balance sheet to raise fiscal integrity.

Amid overall streamlining, welfare and health budget will top 100 trillion won next year for the first time. The campaign promises during the March 9 presidential election to increase salaries of military servicemen and a hand-out of 700,000 won in parental aid for small children will be included in next year’s budget. The increase in welfare spending is inevitable to cope with Korea’s ultralow birthrate and fast aging. The government has a duty to care for the weak and enhance social security net.

Still, a populist rush for cash handouts should be restricted. A large share of fixed expenditures in the government budget make a flexible response to economic calamities more difficult. It is hard to scale back or scrap social benefits once they were offered. Even if they are campaign promises, their careful review and preparation is required for fiscal integrity if possible.

But fiscal deficit is inevitable next year too, as expenditures will outweigh tax revenues. The economy is expected to add 2.1 percent next year. Based on the original budget, spending would increase slightly over 5 percent on year. The government plans to issue 46 trillion won in new debt if tax revenue is short. Issuing massive national bonds can raise market yields but it also can fuel interest rates and inflation.

Normalization of the fiscal balance sheet is necessary. The 2023 budgetary outline could be the first step towards fiscal tightening. Unnecessary expenditures must be kept to the minimum, while spending for future growth must be proactive. Reducing temporary work to raise investment for chips and new industries is a wise move.

The best solution would be honing corporate productivity to increase jobs and tax revenue.