Parties split over budget expansion

Rival parties face tough negotiations this week over plans to raise a supplementary budget to boost the economy and finance welfare measures.

The ruling Saenuri Party and the main opposition Democratic United Party have agreed on the need to arrange an extra spending plan with the economic outlook worsening and a large drop in tax revenues expected.

Although the government has yet to announce details of the plans including the scale of the supplementation, more than 17 trillion won ($15 billion) is expected to be raised.

If approved, it will be the second-largest budget supplementation to be carried out after the 28.4 trillion won raised in 2009.

While agreeing in principle to the proposal, the two parties have locked horns over the method, which the two sides hope to iron out through the six-member bipartisan negotiation group.

The group ― which consists of the chairmen, floor leaders and the chiefs of the parties’ policy committees ― holds its first official meeting Monday to negotiate the supplementary budget as well as the government’s real estate stimulus measures.

The government, with the support of the Saenuri Party, plans to raise the additional funds by issuing government bonds while maintaining expenditures and taxes as they stand.

The plans have met strong opposition from the DUP, which wants to see tax cuts reduced and the government cutting back on spending.

“According to the DUP’s estimates, removing tax exemptions for the rich could increase corporate tax revenues by about 2 trillion won, and about 500 billion won more (can be raised) from personal income tax,” chief of DUP’s policy committee Rep. Byun Jae-ill said at a recent party conference.

Byun also argued that scaling back tax exemptions and reductions provided to affiliates of conglomerates alone would result in significant increases in tax revenue citing data compiled by Rep. Hong Jong-haak of the DUP. According to Hong’s figures, between 5 trillion won and 6 trillion won in extra tax could be gathered through such measures.

Other related measures mentioned by DUP members include widening the top income tax bracket to include those with more than 150 million won in annual income. At present, the top income tax rate of 38 percent is applied to those with 300 million won or more annual income.

“Our party consistently pointed out that tax revenues will fall when drawing up the 2013 budget. The party has conveyed the opinion that the government needs to make more efforts, and that it should cut expenditure by about 2 trillion won (to cover the drop in revenues).”

The ruling party, however, has rejected DUP’s suggestions regarding taxes, saying that introducing such measures defeat the purpose of budget supplementation.

“It is same as saying that budget should not be supplemented,” Saenuri Party floor leader Lee Hahn-koo said at the supreme council meeting on April 8.

“(The DUP) should suggest policy measures that fall in line with the outline that was agreed to. Budget supplementation and the real estate policies are emergency measures the government is using to respond to urgent situations. And timing is of the foremost importance in (executing) emergency measures.”

Rep. Na Seong-lin, interim chief of the ruling party’s policy committee, also reaffirmed the opposition to the DUP’s tax-related suggestions.

“If taxes are raised, then there is no effect from budget supplementation. What is the point of budget supplementation when investments and spending will fall?” Na told reporters after a meeting with government officials on Friday.

“And, even if taxes are raised, the revenues will not come in this year but next year. (Raising taxes) is nonsense.”

While the two sides argue over the method, the plans are fueling concerns that the bond issuance will push the government debt to unhealthy levels.

Last year the government estimated that the state debt will come in at about 465 trillion won this year, which will be pushed up beyond 480 trillion won if the bonds are issued.

Including the debts held by state-run organizations, the figure rises to well above 900 trillion won.

According to the Ministry of Strategy and Finance, combined debt of the 41 state-run organizations with assets exceeding 2 trillion won stood at 444 trillion won as of 2011.

The figure is estimated to have risen to more than 500 trillion won last year.

In addition, plans have also raised concerns that government bond prices will drop and push up interest rates.

The government, is playing down these concerns, saying that the impact will not be significant.

“Funding the supplementary budget by issuing government bonds could fuel worries that the interest rate will be pushed up, but the rates will not rise by much as there is much demand for government bonds,” Deputy Prime Minister for economic affairs Hyun Oh-seok said at a recent press conference.

“Even so, the government will announce plans to stabilize the market when bonds are issued for the supplementary budget.”

The budget supplementation plans have also raised legal concerns from critics who say that current conditions do not meet the criteria for budget revision stipulated by the law.

Under the National Finance Act, once the budget is finalized it can only be revised if war or large-scale natural disasters occur, or if significant changes in domestic or international circumstances including inter-Korean relations are deemed likely. The act also stipulates that the budget may be revised if government expenditure is increased in accordance with related acts.

The legal controversy is amplified by the fact that the government and the ruling party opposed a supplementary budget last year, saying that the economy was not in a slump.

Last year, the government claimed that the country’s economy had grown at a good rate and projected that growth of around 3 percent would be possible during the second half of this year.

Former Finance Minister Bahk Jae-wan also refuted the claims that the economy was in a recession, saying that a recession is when the gross domestic product decreases for two or more consecutive quarters.

With the launch of the new administration, however, the government lowered its economic growth projection to 2.3 percent and high-level officials have warned that severe economic difficulties are possible without budget supplementation.

“Without budget supplementation, there could be a fiscal cliff during the second half of the year,” Second Vice Finance Minister Lee Seok-joon warned at a press briefing last month.

A fiscal cliff refers to a combination of tax increases and government spending cuts late last year and early this year which the U.S. government feared might have a detrimental effect on its already shaky economic recovery.

By Choi He-suk ()