Today’s debt is tomorrow’s tax

Ha Hyun-ock
The author is an editorial writer of the JoongAng Ilbo.

In a radio interview last week, Democratic Party (DP) Rep. Park Joo-min said that the economy is stuck in “recession-type inflation” to stress the need for a cash handout to the people. He attributed the incomprehensible phenomenon to a drastic decline in consumption from a recession.

To use “recession” as a prefix, it should be the cause of an economic situation. For instance, the term can be used for a “recession-triggered surplus,” when imports slow at a faster pace than exports due to a slump at home. According to Park’s theory, the recession causes a slump while pushing up prices. But when demand decreases, prices cannot go higher.

What the lawmaker of the majority party really meant to say appears to be “stagflation,” in which inflation runs high despite stagnation. He underscored the need for the government to take action to jump-start domestic consumption since inflation was triggered by the supply end, not by the usual demand side.

The DP’s focus on lackluster consumption primarily stems from the need to justify the liberal party’s persistent demand for a universal cash handout for the people. DP leader Lee Jae-myung demands that the government borrow his idea of providing 250,000 won ($181) in cash for each citizen — as well as an additional 100,000 won for people relying on basic allowance and in the second-bottom income bracket. The spike in grocery prices has sapped purchasing power for consumers. The DP leader thinks that extra money in their pockets can ease some of their economic pains and boost spending.

But he didn’t mention the downside risks. To finance the stimulus program, 13 trillion won will be needed. When that much of money pours into the market, it can fuel inflation further. Rep. Cho Jung-hun, a straight-talking PPP lawmaker, challenged the logic last week. “The money is proposed to help people against high prices, but if they use it, prices will go up higher,” he pointed out, adding, “The price of the one-time incentive could be too damaging for the economy.” Relief against soaring prices can add wings to them. Such a prescription will also leave a bad precedent of resorting to public funds whenever prices rise.

Moreover, the public finance account cannot afford such massive spending. Korea’s national liabilities reached 1,127 trillion won at the end of last year, adding 60 trillion won from just a year ago. The national debt-to-GDP ratio has already hit a new historic high of 50.4 percent. The government expects another shortfall in tax revenue this year following last year’s 56 trillion won. If the government should prepare the money, it has no other choice but to issue additional national bonds to raise 13 trillion won. Interest payments on existing loans amount to 29 trillion won this year. More debt would certainly worsen fiscal strains.

The economy managed better-than-expected growth of 1.3 percent in the first quarter thanks to gains of 0.9 percent in exports and 0.8 percent in private consumption. Although the data cannot speak for the entire economy, this is still not the best time to wrangle over a stimulus. The effect of a helicopter drop remains questionable. According to a study by the Korea Development Institute on the first round of the pandemic relief fund, the positive impact on consumption stopped at 0.26 to 0.36 times. In other words, a 1-million-won check led to a spending of 260,000 won to 360,000 won. Another study showed a reduction in spending after a brief rise in the immediate wake of the cash handout.

Nothing is free, and the same goes for the government’s generosity. Issuing debts spells the need for more tax collection. The public ends up footing the bill. “Today’s debt is tomorrow’s tax,” reads the front page of the German Taxpayers Federation’s website.

The opposition wants to take credit for the spending with people’s tax money, which will eventually be charged to the younger generation. The majority party also pays little heed to inflationary ramifications. If the DP wants to celebrate its landslide election victory with debt, it must not forget that the stakes are high.