| The government plans to draw up a deficit budget in 2014 for the second straight year, reversing its promise to shift to fiscal surplus from next year. It is the first budget planning by the new government. In September last year, the government said it would set up a surplus budget from 2014, and lower national debt to GDP ratio to the 20 percent range (now at 36.2 percent) from 2015.
The government`s false assertion is likely to continue. The reason it`s setting up a deficit budget for next year is because more people will be benefiting from existing welfare programs. It does not reflect new welfare programs. Aging population is the main culprit. If welfare pledges are carried out properly, deficit will grow. The Park Geun-hye administration hoped to achieve a fiscal balance within President Park`s term but this appears to be an unrealizable target.
The government can choose budget deficit or surplus considering economic conditions and policy goals. The Korean economy has turned for the better and a rebound will become more visible next year. But the government is not drawing up budget deficit to fund projects to artificially boost the economy. The fiscal deficit currently faced by Korea comes as the government made areas to spend money but was negligent in preparing necessary money.
Korea`s welfare spending is 9.5 percent of GDP, less than half the OECD average of 19.5 percent. The figure is only higher than Mexico, who ranks the bottom among the 34 OECD member countries. Tax burden ratio is 20.2 percent, too low compared with fiscal demand and national status. Though public consensus is needed on the level of welfare and tax increase, it appears inevitable to increase welfare and raise tax accordingly.
Yet the government plans to raise tax burden ratio by a meager 0.8 percentage point over the next five years to 21 percent in 2017. It will do so not through direct tax increases but by revamping non-taxation system and legalizing underground economy. The presidential election pledge of "welfare without tax increase" has put a drag. A majority of fiscal experts say this is impossible but the government remains silent. If the incumbent administration wants to expand welfare, it should explain to the public why tax increase is inevitable. Avoiding the matter could result in a failure in carrying out both welfare pledge and fiscal soundness.