Recovering fiscal integrity
The government is working to cut salaries of government employees of those ranked vice-ministerial and higher by 10 percent in its proposal of next year’s budget. Finance Minister Choo Kyung-ho said the government was streamlining expenses on a large scale as the public sector must set an example. The Finance Ministry seeks to cut next year’s budget by more than 30 trillion won ($23 billion) from this year’s 679.5 trillion won. In his Liberation Day speech, President Yoon Suk-yeol confirmed this by vowing to operate public finance “as healthy as possible.”
Korea’s fiscal condition has worsened due to an 8.7 percent average increase in spending over the last five years under President Moon Jae-in. National debt that was at 600 trillion won under President Park Geun-hye exceeded 1,000 trillion won. The national debt-to-GDP ratio jumped from 36 percent to over 50 percent. By 2025, the ratio is expected to top 60 percent. Under the last government, cash welfare benefits increased. Ten supplementary budgets were created, timed with the elections, for Covid-19 relief.
National liabilities will only grow as economic growth is expected to be fixated at around 1 to 2 percent due to demographic weakness from the low birth rate and aging. The Yoon Suk-yeol administration inevitably has turned to fiscal tightening to save public finance. Without belt-tightening, the government cannot maintain fiscal integrity. As tax revenue was short to cover for the surge in spending, the government had to issue national bonds over the past four years. An individual or company with such reckless management could face bankruptcy.
To meet Yoon’s campaign promise, the government needs to increase cash benefits to fund monthly salaries for conscripts that would go up to 2 million won ($1,500), basic pension to 400,000 won and child care allowance to 700,000 won. But corporate tax revenue will likely fall due to worsening trade conditions. The government also promised to cut corporate tax and individual income tax by 60.2 trillion won over the next five years to help stimulate private-led growth. At this rate, the government may not be able to meet its target of keeping the national debt-to-GDP ratio at 60 percent over the next five years.
Raising corporate productivity would be the sole solution to bolster public finance. Unnecessary regulations should be removed, and companies should be motivated to invest through labor and education reforms. Fiscal solidity will be strengthened when jobs and tax revenue increase. The benign cycle should be established to prepare money for the working and the socially weak. Restoring fiscal integrity should be the beginning.
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