Concerns Over Supplementary Budgets for Five Straight Years

The government is preparing a supplementary budget bill. A supplementary budget is one that alters the existing budget only when unavoidable circumstances arise. In other words, there must be an unavoidable reason to formulate one. The government cites fine dust as the reason for the supplementary budget. But this sounds like nothing more than a strained excuse.

The 2019 government budget stands at 469.6 trillion won, up 9.5% from the previous year. This is the highest rate of increase since 2009, when it reached 10.6% amid the global financial crisis and bold fiscal spending was deemed necessary. For a government that already drew up a budget with such a sharp increase in spending to seek even more spending through a supplementary budget only heightens concerns over lax fiscal management.

It is also undesirable to formulate supplementary budgets as if they were an annual ritual. Following 2015 through 2018, this now marks five consecutive years of supplementary budget formulation. Under the Moon Jae-in administration, this is already the third. The scale was 11 trillion won in 2017 and 3.9 trillion won in 2018. This year, the government says it will keep it below 9 trillion won. But only three months have passed since the new year began. In particular, drawing up a supplementary budget despite no major change in economic conditions since last year is hardly persuasive.

Moreover, there is the problem that spending on projects included in the supplementary budget may be inefficient. The government is seeking to expand SOC (social overhead capital) infrastructure projects, even by lowering the economic feasibility standards in preliminary feasibility studies. If that happens, there is a risk it will end up as politically motivated handouts for local pet projects with weak economic justification. In the past as well, many local airport and railway projects were pushed forward with the focus solely on implementation, only to become troubled later because the burden of operating costs proved unsustainable.

The government argues that “a supplementary budget is absolutely necessary to raise the economic growth rate.” But this is a short-term view. An increase in government spending does not affect only the current year. Once spending is increased, it creates a structure of recurring expenditures that must be paid year after year, inevitably increasing the long-term burden. In addition, when the government replaces areas previously handled by the private sector with public projects, it lowers the efficiency of the economy as a whole. Such fiscal spending can ultimately lead to higher taxes and increased government debt over the long term.

If the government continues repeating fiscal-centered macroeconomic policies, it could fall into the kind of compound recession Japan experienced in the past. Japan indiscriminately rolled out stimulus measures and ultimately failed to reform its weak economic structure, suffering a decade-long slump. An economic structure that depends on government spending without revitalizing the business sector loses vitality and cannot avoid the trap of deterioration.

The government should not try to solve economic growth and employment problems by relying on fiscal spending. Expanding the budget by increasing outlays may look like an easy solution, but its hidden costs are greater. The public will have to bear more taxes, and the private economy will inevitably shrink by that much. Moreover, as government spending rises over the long term, fiscal soundness is threatened accordingly.

Rather than relying on a supplementary budget, the government should more actively work to strengthen corporate competitiveness and revitalize the private economy. Boldly easing regulations and creating a business-friendly environment is the right path.

Sung-no Choi, President, Center for Free Enterprise (CFE)

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Original title: 5년 연속 추경예산에 대한 우려

Author: Sung-no Choi

Date: 2019-04-07

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=25&idx=20087