Did you forget the crocodile’s jaw?

Cho Min-geun
The author is the business and industry news director of the JoongAng Ilbo.

“We call this a crocodile graph,” an official of Japan’s Ministry of Finance said when I pointed to a strange-looking chart pinned on his table during my visit to his office in the summer of 2011. It charted the trend of tax revenue and spending of the Japanese government since the 1970s. Two trend lines moving in parallel diverge abruptly from the 1990s, with one in an upward direction and the other downward. The tax revenue sharply thinned, following the asset bubble burst while spending increased exponentially. The yawning gap translated into debt. Spending increased further to pay off the debt. The vicious cycle became a graph resembling the wide-open jaws of a crocodile.

The official pinned the print of the graph on his table after he accompanied the finance ministers’ talks between Korea and Japan in Tokyo. Yasushi Manago, the ministry’s top official on budget affairs, explained Japan’s fiscal troubles with the graph, advising Seoul officials to avoid going down Japan’s path.

I wrote an article on the warning of the crocodile graph, which made substantial ripples at the time. Then Korea’s Finance Minister Bahk Jae-wan balked at the flurry of welfare benefits and spending promises by politicians ahead of an election, describing them as a “pork barrel.” The Finance Ministry released a projection of public finances through 2050 to warn of Korea’s fiscal troubles ahead. The crocodile chart is revisited every time fiscal integrity comes under threat.

The episode of 13 years ago came to my mind upon the Finance Ministry’s recent release of national tax income data. The government collected taxes of 344.1 trillion won ($258 billion) last year, down by 51.9 trillion won from a year ago and by more than 56 trillion won against earlier estimated income. The shortfall was the biggest since 2013, making a heavy toll on public finance account. The balance of income minus expenditure showed a deficit of 64.9 trillion won as of November. Government debt is estimated to have topped 1,100 trillion won last year. The debt-to-GDP ratio, which was at 30 percent, hovers at 50 percent. Fortunately, the debt growth has eased somewhat after peaking during the liberal Moon Jae-in administration.

I recalled what Manago mentioned as a cautionary tale. He said that fiscal deficit worsened because Tokyo did not quickly respond to the obvious fallout from fast aging. The increased share of elderly population does not just mean a bigger welfare cost. It also means reforming the welfare system is very hard due to stronger political voices from the elderly voters than in the past. “How can we fix the pension system when one out of four Japanese picks up a pension check?” he retorted. Japan attempted to overhaul the social benefit system, but its actions could not catch up with the pace of deterioration in public finance and aging. As a result, Japan sits on the world’s biggest pile of debt, overwhelming its GDP by 200 percent.

Korea may become a superaged society next year with the population share of those aged 65 or older projected to exceed 20 percent. The pace is exceptionally quick as just seven years have passed since Korea was categorized as an aged society in 2018 with the elderly share in total population passing the threshold of 14 percent. It took the United Kingdom 50 years, France 39 years, the United States 15 years, and Japan 10 years to make the jump in their aging status.

Headwinds in reform are already building up. Politicians stopped talking about pension reform. They instead are busy appealing to elderly voters, promising to include caretaking in national medical coverage and hand out free meals at senior centers. Their focus on elderly voters is understandable as those aged 60 and older make up 31.4 percent of eligible voters, exceeding the 28.8 percent of those in their 20s and 30s combined.

The government appears to be hitting the brakes on the reform drive until the election is over. We must go back to Manago’s advice to Korean bureaucrats to take action before it’s too late. There is no return once the crocodile starts opening its jaw.