We Need Fiscal Spending Rules

Government spending is increasing sharply every year. According to the 2017–2022 fiscal management plan, it is expected to rise by more than 7% annually. In fact, this year’s budget increased by 9.5%, and next year it is expected to grow by 7%, bringing the budget to more than 500 trillion won.

By contrast, the economic growth rate is declining year by year. Even achieving growth in the 2% range, which falls short of the pace of global economic growth, is proving difficult. There is growing concern that our economy may face structural problems as a result of successive policy failures.

Meanwhile, the government alone is increasing its spending, heightening concerns that this could lead to a fiscal crisis in the long run. This is because the government is significantly expanding its finances mainly through current expenditures that must be paid every year, such as welfare and education spending. As the share of this rigid budget increases, and as natural increases caused by population aging are added on top of it, there is a strong possibility that fiscal deterioration will accelerate rapidly.

Under the previous Park Geun-hye administration, efforts to collect more tax revenue bore fruit, resulting in a sharp increase in tax revenue through last year. Because of this, government debt did not rise dramatically. However, it seems clear that tax revenue growth will begin to slow from this year. Unless the government makes every possible effort to keep spending within the range of tax revenues, a rapid increase in debt is likely.

We have seen neighboring Japan massively increase fiscal spending on the grounds of economic stagnation, only to bring about prolonged recession and a sharp rise in national debt. It is now trying belatedly to solve the problem by raising the consumption tax, but the reality is that once debt has increased, it is very difficult to bring it down.

Any ruling party that takes power always wants to spend as much public money as it pleases. But most of those budgets are of questionable feasibility. As a result, they often spark political controversy and are criticized as wasteful spending.

Fortunately, both the ruling party and the opposition have submitted “fiscal soundness legislation” to the National Assembly. This is an opportunity for both sides to agree on and establish rules that will ensure fiscal soundness from a long-term perspective. If the government is to manage public finances solidly, it needs to legislate the following two rules.

First, it is important to establish a fiscal rule on how much the government will spend relative to the size of the economy. In other words, limits should be set on the ratio of fiscal spending and national debt to GDP so that those lines are not crossed. This can be decided by making full use of the expertise of the relevant ministries.

Next, it is necessary to establish a rule on the level at which deficit budgets will be restricted. That is, a ceiling should be set on the fiscal deficit as a ratio of GDP. At this point, we also need to take into account what advanced European countries have experienced on multiple occasions.

Such legislative efforts to restore fiscal soundness are only possible if the government has the will to strengthen the weak fundamentals of the economy and pass on sound public finances to future generations. Now is the time for politicians to wake up.

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

---

Original title: 재정지출 준칙을 정해야

Author: Sung-no Choi

Date: 2019-06-10

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&pn=24&idx=20277