Raters should monitor Korea’s fiscal health
Rating agencies such as Moody’s and Standard & Poor’s must be watchful of Korea’s economic health following the parliamentary elections next month. They have ample reason to downgrade the nation’s credit rating as long as parties adopt deficit-oriented welfare programs.
Ahead of the National Assembly elections on April 11, the two leading parties unveiled pledges to increase welfare. Their commitments will be possible only when the government hikes tax, doubles the current growth rate or incurs a deficit.
The ruling Saenuri Party committed 75.3 trillion won in its five-year welfare projects, including free education for high school students. The opposition Democratic United Party has pledged 164.7 trillion won, 2.2 times more than the governing party. Its commitments feature the so-called 3+1 programs, including free childcare, free medical care and free school meals, plus halving college tuition.
Their programs would cost 16-33 percent more than this year’s welfare spending.
A Korea Tax Institute analysis shows that the government can raise 10 trillion won or 1 percent of gross domestic product, without raising taxes. It means the government can mobilize up to 50 trillion won for five years through squeezing other budgets.
The parties are keeping mum on growth projections. They seem to think the economy will grow automatically. Korea’s potential growth rate _ the growth rate not entailing serious inflation ― is 4.5 percent. However, the economy should grow by more than 7 percent each year to meet the pork-barrel welfare commitments. This is an impossible scenario for the world’s 15th largest economy.
It is true that people are sick and tired of optimistic growth projections following President Lee Myung-bak’s so-called 747 program promising 7 percent growth, $40,000 per capita income and the nation becoming a G7 economy. Welfare programs without any growth estimate will trigger public ridicule.
No welfare is possible without sustainable growth. A Samsung Research Institute report says Korea can increase its growth rate, or one-quarter of the current growth rate, once all social tensions are solved.
The parties can generate part of welfare funds through their politics of compromise. The tension in Korea has seriously stunted economic growth. National leaders, including the President and elective post-holders, should be problem solvers, rather than troublemakers.
People on the street know that the government has limits in increasing welfare programs without growth or tax hikes. Politicians seem to believe they have a magic way that even Nobel laureates in economics do not know.
The agencies will likely downgrade the nation’s rating as Korea’s welfare spending will be on the fastest rise in the world. Korea’s government debt to GDP is manageable now but has been growing the fastest among OECD countries.
Korea badly needs welfare expansion but the nation will surely be sick with the welfare disease unless the campaign pledges entail tax increases or economic growth. Korea must tie welfare to growth. Productive welfare programs, including job incentives, are better than consumptive welfare benefits. It is time for voters to wage warfare against populist welfare pledges.