Excessive welfare may cause fiscal collapse

Conflict between the central government and local authorities are escalating over the expansion of childcare support. On Thursday, 16 major cities and provinces called on the Lee Myung-bak administration to finance the entire cost of the new welfare program. They even threatened to boycott the program unless the state meets their demand.

The budgetary problem has arisen as the Lee government decided to provide 200,000 won ($176) in monthly childcare aid for parents raising babies under the age of three and five-year-old children starting this month. The administration has come under criticism for hurriedly making the decision based on populism without considering fiscal means.

It calls for the state and local authorities to equally share the burden. How could policymakers devise such a burden-sharing formula unilaterally without taking into account the fiscal constraints provinces and municipalities face? Disappointingly, the central government has pushed the program too recklessly and irresponsibly.

President Lee and his policymakers should pay heed to a warning that local autonomy units’ childcare outlays might dry up as early as June or July. If the warning becomes a reality, child-raising support can get nowhere. There is no doubt that ignoring fiscal sustainability will only lead to the failure of the welfare program. Thus, it is urgent to find how to underwrite it.

Things could get worse if the government does not take radical measures immediately. The administration has already decided to expand the program to cover all children under six from next year. Budget planners may argue that local authorities can set aside part of their tax revenue for childcare support. But, provinces and municipalities are not able to do so because they are not financially self-reliant. Many of them are still dependent on state grants for more than half of their budget.

This is not to say that local authorities should continue to rely on subsidies from the state. They should make efforts to expand their revenue and achieve fiscal independence, especially as demand for diverse welfare programs is on the rise. In addition, they should not waste their budget on unfeasible pork-barrel projects. It is also important to fight corruption and improve fiscal efficiency and transparency.

The welfare showdown may be a prelude to a potential fiscal collapse of not only local administrations but also the state. Ahead of the April 11 parliamentary elections, lawmakers and politicians are making campaign pledges to increase welfare spending drastically. They don’t care about how much their commitments cost. They are only interested in gleaning votes with sugar-coated promises.

The elections will test where welfare populism is headed for. More welfare cannot be available without increasing taxes. Politicians and policymakers should not coax voters into believing that they can enjoy more programs without shouldering more burdens. The nation could fall into the trap of populism if we don’t keep in mind that there is no such thing as a free lunch.