[Editorial] Super welfare budget

By Korea Herald

Uncharted paradigm of income-led growth feared to snowball fiscal deficits

  • Published : Aug 31, 2017 - 17:53
  • Updated : Aug 31, 2017 - 17:53
The government budget plan for next year has been set at 429 trillion won ($381 billion), up 7.1 percent from this year.

The rate of increase is the steepest since 2009, when the nation struggled to escape from a global financial crisis.

The rapid budget expansion is attributable to welfare policies the new administration promised to implement, such as raising pensions for low-income seniors and widening state health insurance coverage.

Welfare expenditures have increased 12.9 percent to take up 34.1 percent of the total budget. The education budget has also gained 11.7 percent. Combined expenditures for welfare and education amount to 210 trillion won, about half of the total budget.

The budget plan has been expanded because the Moon Jae-in administration has shifted its policy paradigm from growth led by exports and companies to growth led by humans and income.

The “income-led growth” strategy seeks to spend fiscal money to increase household income through welfare programs in order to induce private-sector growth. However, whether this scheme will work is questionable because it has not been tried and proven yet.

The government slashed social overhead costs, or infrastructure, by 20 percent and increased its research and development budget by a meager 0.9 percent.

Deep cuts in infrastructure may be inevitable to secure resources needed to fund increased welfare programs, but the reduction seems to be too much, considering its role in economic growth.

The passive expansion in research and development also puts people at unease, as research is essential to growth through innovation in a rapidly aging low-birthrate society.

Fiscal deficits expected to be incurred during the five-year term of the current administration are 172 trillion won. This number is close to the 178 trillion won the new government said it would spend in five years to carry out its 100 policies. In a nutshell, most will be funded through debt.

The government said it would save 11.5 trillion won by cutting expenditures. But spending more is pleasing and easy, while spending less is painful and difficult.

There is criticism that the government was so optimistic about growth outlook that it has overestimated tax revenue.

With domestic industrial prospects still not so bright, growth beyond 2 percent next year does not look easy.

The government expects tax revenues to increase by 5.5 trillion won through tax code revision. However, whether a large part of required tax revenues will be secured through tax hikes for superrich individuals and companies is controversial.

It is common sense that tax revenue will swell naturally as an economic pie becomes larger through growth. The government cannot be sure of a sustained increase in tax revenues while paying little attention to growth.

That is why concern is mounting that tax hikes for all income earners will become unavoidable.

The government should have weighed demographic changes before expanding its budget. The population aged 65 or older is getting larger and larger due to fast aging, while the working age population is shrinking. As a result, the number of taxpayers is contracting.

Furthermore, from next year pensions to low-income people 65 years of age and older will rise by about 50,000 won per month, and every child aged 5 and below will receive an allowance of 100,000 won a month.

Government debt will likely top 700 trillion won next year. If the trend of expenditure increases is left unchecked, the figure will snowball from 670 trillion won this year to 800 trillion won in 2021.

This way, future generations cannot but get stuck with the tab.

The Korean economy is beset with troubles such as chronic low growth, high unemployment and income polarization.

Understandably, considering these problems, the government may have taken expansionary fiscal policy. But it is an undeniable fact that surge in welfare spending is prone to hurt fiscal health.

No one would dislike welfare. But if welfare causes a fiscal crisis, income-led growth will hit the skids.

Now the ball is in the court of the National Assembly. Detailed scrutiny is required.