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[Editorial] Fiscal soundness

Discipline in budgetary spending alarmingly absent in Moon administration

March 27, 2019 - 17:22 By Korea Herald

Guidelines for next year’s national budget, approved by the Cabinet on Tuesday, are in line with the expansionary fiscal policy pursued by President Moon Jae-in’s administration.

The Ministry of Economy and Finance, which worked out the guidelines, has said their purpose is to bolster the economy, improve income inequality and strengthen the social safety net.

Each government agency is required to submit its budget request to the ministry by the end of May. The ministry is then obliged to present the state budget proposal to the National Assembly by Sept. 3 for approval.

Under the fiscal management plan drawn up last year for 2018-2022, budgetary spending for 2020 is set to increase 7.3 percent from this year to 504.6 trillion won ($444.5 billion). But that amount is likely to escalate as the Moon administration has since lengthened the list of programs to be financed by taxpayer money.

Governments past and present -- conservative and liberal alike -- can hardly be credited for sticking to fiscal principles. Nevertheless, fiscal discipline has been undermined to an alarming extent under the Moon administration, which has pushed policies critics view as misguided, saying they increase costs and promote inefficiency.

Small businesses have been pressed by the government to accept employment subsidies instead of laying off workers to cope with steep hikes in the minimum wage.

Growing sums of money have been poured into the creation of temporary and unproductive jobs in the public sector.

In an apparent bid to win voter support ahead of next year’s parliamentary elections, the Moon administration has vowed to carry out massive public works projects around the country without conducting feasibility studies.

The most blatant example of its neglect of fiscal discipline is its habitual use of supplementary budgets.

Finance Minister Hong Nam-ki, who doubles as deputy prime minister for economic affairs, said last week that the government was considering drawing up a supplementary budget to improve economic conditions and fight air pollution from fine dust. It would be the third such budget drawn up by the Moon administration since its launch in May 2017.

Hong did not specify how much would be allocated under the additional spending plan, but it is expected to be as much as 10 trillion won.

It may be hard to win public support for additional fiscal expenditure this year, given the government has already budgeted 469.6 trillion won for 2019, up from 428.8 trillion won for 2018. That 9.5 percent increase was the highest since 2009, when the country was struggling with the fallout from the Great Recession.

Supplementary budgets implemented over the past two years to create jobs -- 11.2 trillion won in 2017 and 3.9 trillion won in 2018 -- did little to reduce unemployment.

The idea of bolstering the economy through additional fiscal spending is also at odds with the Moon government’s assessment of the country’s economic conditions. In a Cabinet meeting last week, Moon said it was “fortunate that our economy has improved in many respects amid a gloomy outlook for the world economy.”

It would make little sense to draw up an extra budget to help reinvigorate the economy if the economic situation had turned positive.

In fact, the government’s diagnosis of the economy flies in the face of reality. According to recent data from Statistics Korea, the composite indexes of coincident and leading indicators, which reflect current and future business conditions, declined together for eight consecutive months through January. The country had not seen such a prolonged simultaneous fall in both indexes since February 1972.

What is even more worrisome is that the country’s exports, which had shored up the economy amid sluggish domestic demand, have continued to decrease in recent months.

The Moon administration seems to be trying to paint a rosy picture of the economy in response to growing criticism of its impractical ways of handling economic matters. Anyway, additional fiscal spending would do little to reinvigorate the economy without a fundamental policy shift. The administration needs to discard the ill-conceived income-led growth policy, which has only worsened unemployment, and focus on regulatory and labor reforms to encourage companies to increase investment and hire more workers.

Continuous fiscal expansion also risks increasing the national debt at a rapid pace, as tax revenues are expected to drop in the coming years due to falling corporate profits and slumping property markets.

Last week, a group of former economic policymakers and journalists issued a statement calling for placing fiscal principles ahead of political considerations. It went largely unnoticed, but should serve as a wake-up call to restore fiscal discipline.