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For S. Korea's fiscal prudence
Publication Date : 14-09-2013
According to a five-year fiscal management plan, South Korea's national budget for the 2014 fiscal year should be balanced.
Reaffirming the fiscal management plan in September last year, the Lee Myung-bak administration promised that revenues would exceed spending in 2014 although the surplus would be marginal.
But the mid-term fiscal plan, updated each year, must be overhauled, with President Park Geun-hye’s administration reportedly set to run a sizable deficit in the year its first budget will be implemented. Still worse, a budgetary balance may prove an elusive goal during the next five years of her governance.
In fairness, the Park administration alone cannot be held accountable for the vice of spending beyond its means. Still, few signs are found that it is exercising fiscal restraint. On the contrary, it has promised to spend more on welfare without increasing taxes.
It is undeniable that the previous administration’s economic mismanagement, coupled with a protracted worldwide slump, cast a long shadow on the Korean economy. With growth severely stunted, the nation sustained a 46.2 trillion won (US$42 billion) deficit, the largest ever, in the first half of this year. The problem is that it will undoubtedly take time to regain growth momentum.
The Park administration will need a magic wand if it wishes to expand welfare programmes without raising taxes and, at the same time, to balance the budget and recover fiscal prudence. It says this goal is attainable when it successfully brings a large portion of the underground economy to light and puts it under the scrutiny of state tax auditors.
That is easier said than done. If not, why has the Park administration reportedly decided to sustain a deficit in its 2014 budget request?
According to a news report, spending on welfare is projected to surpass the 100 trillion won mark next year, with the Park administration starting to launch its welfare programmes, dishing out basic pension benefits and providing free child care among others. The report says welfare spending will hover around 105 trillion won. This year, 97.4 trillion won is earmarked for welfare programmes .
A senior budget officer is quoted as saying that it is necessary to run a deficit if the administration is to make good on Park’s election promises. But the official added the 2014 deficit as a percentage of gross domestic product will not exceed this year’s deficit projection of 1.8 per cent.
As the nation continues to run budget deficits while growth slows, the National Assembly Budget Office says the national debt as a percentage of GDP, an index that is used to measure a nation’s fiscal soundness, will rise from the current 36.2 per cent to 38.4 per cent in 2016.
If spending had been faithfully managed in accordance with the five-year plan, the national debt would have been lowered to 30 per cent of GDP or below by 2015. But it has not been. Now the goal is unattainable.
The Park administration will have to increase tax revenues, cut welfare spending, or do both if it does not want to be stigmatised as having been spendthrift. It has to commit itself to recovering fiscal prudence.