The National Assembly has started deliberations on the 2013 budget bill. The government has proposed to spend 342.5 trillion won out of the expected gross revenue of 373 trillion won, using the remainder for debt repayment.
This year, the government is expected to face fierce attempts by both the ruling and opposition parties to expand welfare spending and increase taxes on the rich in their bid to gain more votes in the coming presidential election.
The government should rein in these populist moves as reckless welfare expansion and tax hikes would make it more difficult for the economy to get out of the ongoing downturn.
There is one thing that the main political parties should know ― that the budget bill’s revenue projections are exaggerated. According to the National Assembly Budget Office, the government wrote the proposal based on an overly optimistic scenario.
In the first place, the bill is based on a forecast that the economy would grow 4 percent next year. But the parliamentary budget office suggests 3.5 percent, in line with other research institutes. A 0.5 percentage point cut in growth would knock 2.3 trillion won off the government’s tax revenues.
More importantly, NABO forecasts that the government’s non-tax revenues would fall short of the target by 11.2 trillion won because the planned sales of the state-owned shares in such corporations as Industrial Bank of Korea and Korea Development Bank would not be realized.
NABO is right to take the stake sales plan out of consideration as the new government to be inaugurated next February is unlikely to push ahead with the incumbent government’s privatization scheme.
As a result, NABO says the budget deficit in 2013 would reach 18.5 trillion won, much bigger than the government’s estimate of 4.8 trillion won.
The budget office also stands poles apart from the government on the medium-term fiscal balance. While the government forecasts a budget surplus after 2013 ― 1 trillion won in 2014, 2.2 trillion won in 2015 and 8.3 trillion won in 2016 ― the office projects a fiscal deficit of about 20 trillion won each year.
Consequently, the two present widely divergent trajectories for the national debt. The government forecasts the public debt-to-GDP ratio would fall sharply from 33.2 percent in 2013 to 28.3 percent in 2016. Yet NABO predicts the ratio would edge up from 35 percent to 35.9 percent during the period.
Despite the expected increase in budget deficit, the ruling Saenuri Party and the main opposition Democratic United Party are determined to expand welfare programs.
For instance, they have already pledged to scrap the government’s plan to scale down the free day care program for toddlers less than 24 months old. Currently, benefits are provided to all families, regardless of their income, only if they send their children to a day care center. The government plans to limit the scope of beneficiaries to the bottom 70 percent.
It should be noted that any attempt to maintain the current program goes against the findings that in-home care is better than day care for emotional development of toddlers.
The parties are also eager to increase taxes on the rich and big corporations to finance their welfare pledges. The DUP seeks to lower the threshold for the highest income tax rate of 38 percent from the current 300 million won to 150 million won. The Saenuri Party has proposed to bring down the threshold to 200 million won.
Yet tax increases are bound to negatively affect consumer confidence. They are especially undesirable when the economy is in a slump.
By the same token, it is not a good idea to increase corporate taxes. A heavier tax burden reduces a company’s investment capability. Furthermore, it will make Korea less attractive to foreign investors.
If tax revenues should be increased, the least harmful way may be to increase the value-added tax rate, which has been maintained at 10 percent since its introduction in 1977.
In a recent report, the Korea Institute of Public Finance proposed to increase value-added tax, saying that VAT in Korea was not as regressive as conventional wisdom would have us believe.
But before seeking to raise taxes, lawmakers should first eliminate absurd pork-barrel spending projects. That is their duty.
