In a fiscal strategy meeting last week, President Moon Jae-in reaffirmed his plans to continue to expand government expenditure.
“It is urgent to solve structural social problems such as low growth, bipolarization, the low birth rate and the rapid aging (of the population),” he said at the meeting. “The government budget must take on a bolder role than ever before to solve these problems.”
Government budgets expanded for two straight years after Moon took power -- 7 percent and 9.5 percent for 2018 and 2019, respectively. The 2019 budget has hit a record high of 470 trillion won ($390 billion). The Moon administration has also proposed its third revised supplementary budget, worth 6.7 trillion won, and submitted it to the legislature.
The government has spent 77 trillion won on job creation programs but employment conditions have not improved, particularly for those in their 30s and 40s and those in the manufacturing sector. Most of the new jobs created with taxes had little to do with industrial productivity. They were temporary jobs for senior citizens, such as picking up litter or walking kids to school.
The problem of inefficient tax spending by provincial governments is severe. Despite their low fiscal self-sufficiency, they splurge on populist welfare programs, such as free education or generous childbirth incentives.
The tax revenue boom -- more taxes were collected than planned for the past two years -- shows signs of ending this year. Household income has scarcely increased. Top-30 listed companies saw their operating profits plunge 42.7 percent on average in the first quarter from a year earlier.
If the administration maintains its current course and continues its expansionary spending habits -- the 2020 budget is certain to go well over 500 trillion won -- it will likely outspend tax revenue starting next year. Then it will have to issue bonds, and the ratio of government debt to gross domestic product is likely to surpass 40 percent, which was the Maginot Line set by the government in 2015 to be respected through 2060. The ratio will rise to 39.5 percent this year if the revised supplementary budget is executed.
As an opposition party leader in 2015, Moon had criticized the government for crossing the line in its 2016 budget proposal. But now, as president, he ignores the ceiling bluntly and instructs the government to keep spending more.
The belief that the Korean economy can endure continued fiscal expansion is an illusion. Due to the rapid aging of the population, the labor force is set to shrink to unprecedented lows within about a decade, and then tax revenue will likely decrease sharply.
Nonetheless, the government and the ruling party have seldom mentioned sound fiscal management. They ought to know that once government spending increases, it is difficult to reduce it.
Few would oppose increased government spending if it could help the national economy recover its growth momentum or if it could establish a solid social safety net. But the Moon administration has spent taxpayers’ money without hesitation to remedy the adverse effects of its own misguided policies.
It prevented bus drivers from going on strike by promising to subsidize their wages. It is unlikely that this support will end up being a one-time expenditure. The government also opened the door for 23 infrastructure projects by exempting them from feasibility studies designed to filter out the wasteful ones. The projects will cost 24.1 trillion won altogether.
On the day Moon urged the unreserved expansion of the government’s fiscal role, the Korea Development Institute, a state-run economic think tank, suggested a different approach. “It is difficult to escape from low growth through short-term fiscal expenditures,” the institute said. “If an expansionary fiscal policy is carried out repeatedly, the policy cannot be sustained in the mid- and long terms.”
The KDI stressed the importance of raising productivity to restore the momentum for growth. The institute advised the government to concentrate on market vitality and business activity, rather than stimulating the economy with taxes.
The Moon administration ought to heed the KDI’s warning that if the expansionary fiscal policy continues and productivity stays as is, Korea’s growth rate will plunk down to the 1 percent range by the 2020s.
The government must not squander taxes. Taxpayers’ money should be used efficiently to revive growth. Taxpayers are not geese that lay golden eggs.