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Super budget through an expansion of national debts

Posted August. 31, 2016 07:13,   

Updated August. 31, 2016 07:38

한국어

At a Cabinet meeting on Tuesday, the government finalized next year’s budget plan entailing a total expenditure of 400.7 trillion won (359 billion U.S. dollars) and a total revenue of 414.5 trillion won (371 billion dollars) and decided to submit it to the National Assembly on Friday. The total expenditure has increased by 3.7 percent, and the total revenue by 6.0 percent year-on-year. This is the first time that budget has exceeded 400 trillion won (358 billion dollars).

"Expansionary fiscal spending" is inevitable to some extent amid a situation where the global economy remains in a low-growth phase, while both export and import are in a slump. Given that deficit-financing government bonds worth 28.7 trillion won (25.7 billion dollars) will be included in next year’s budget, the national debt will rise to 682.7 trillion won (611 billion dollars), an increase of 236.8 trillion won (212 billion dollars) or 53.1 percent from 2012. The ratio of national debt to GDP will also increase from 40.1 percent (based on ordinary budget) this year to 40.4 percent next year. President Park Geun-hye pledged during her campaign that her government will achieve a balanced budget and manage the ratio of national debt to GDP within the mid-30 percent level within her term in office, which has effectively become a blank promise.

It is also questionable how much effect the expansionary budget will have on priming the pump for economic rebound. The budget for social overhead capital has decreased by 8.2 percent from this year, and that for industry, small and medium-size businesses and energy has fell by 2.0 percent, while only budget for R&D gained by 1.8 percent. In contrast, the budget for welfare, health, and labor has gained by 5.3 percent to 130 trillion won (116 billion dollars), an all-time high, and the defense budget has increased by 4.0 percent to 40.3 trillion won (36 billion dollars). We should not only underscore the negative aspects of expansions in welfare and defense budgets for the era of low fertility rate and aging population, and security threat posed by North Korea, but it cannot be denied that the two areas accounting for 42.5 percent of the overall budget add to burden on the budget. Korea should increase efficiency in implementation of budget in the welfare and defense areas to prevent wasting.

The government forecasts next year’s actual economic growth at 3.0 percent and ordinary growth rate at 4.1 percent, predicting the national tax revenue at 241.8 trillion won (271 billion dollars). The government seems to have an overly positive outlook on the tax revenue. If the current trend continues, chances are high that the actual growth rate will remain at the 2 percent level again next year, while the inflation rate remains near zero percent. If tax revenue declines due to lower economic growth rate from the predicted, the national debt could increase further.

Only when the government reignites the growth engine by providing companies with incentives, such as deregulation and labor reform in industrial sectors, so that they can voluntarily expand investment, then will Korea be able to address the vicious cycle of national budgeting that resorts to issuance of government bonds. The National Assembly should carefully examine if there are unnecessary projects and whether budgets will actually shore up people’s livelihoods and the national economy in the course of budgetary review.



권순활논설위원 shkwon@donga.com