The nation’s expenditures are projected to exceed its revenues next year, albeit by a miniscule margin of 0.3 percent, as is shown by the administration’s budget request. The budget deficit will undoubtedly be seen as a major setback for President Lee Myung-bak, whose administration has repeatedly promised in the past to balance the budget by 2013.
The administration says it has had to make a tradeoff between its promise on fiscal balance and the need for a stimulus package, adding that it has settled on a small deficit. That is not beyond comprehension, given that growth is projected to harbor around the level of a dismal 2.5 percent this year.
But the problem is the budget gap will widen if the next year’s actual growth falls below an unwarrantedly optimistic target of the Lee administration. If so, the next administration will have to hold the bag. With its term in office expiring in February, the Lee administration will have been long gone by the time its successor tallies 2013 revenues and expenditures.
The Lee administration forecasts the nation’s gross domestic product will increase 4 percent next year. But the Korea Development Institute, a government-funded research institute, is less sanguine. Citing the worsening economic conditions both in and outside of the nation, the KDI has recently lowered the nation’s 2013 growth outlook sharply ― from 4.1 percent to 3.4 percent. Private think tanks are even more conservative in their forecasts.
When it was inaugurated in February 2008, the Lee administration gave top priority to growth, promising that GDP would increase at an unbelievably high rate ― an average annual rate of 7 percent. Its policy emphasis, however, shifted from growth to fiscal soundness as the domestic economy was buffeted first by the U.S. subprime crisis and then by the eurozone’s snowballing debt problem.
Now the Lee administration acknowledges it is impossible to attain its goal of balancing the budget next year. Putting a bold face on the worsening global economic conditions, however, it has come up with a dubious assertion that its budget request “practically maintains the basic framework of fiscal balance.” It even claims that the European Union regards a budget with a deficit smaller than 0.3 percent as balanced. No matter what it says, the “basic framework of fiscal balance” is not the same as fiscal balance.
Now that it has abandoned the goal of balancing the budget next year, the administration also has to give up the vaunted desire to pave the way for reducing the ratio of national debt to GDP to less than 30 percent in 2014. It now says that this debt reduction target will have to be delazed by one year.
The administration, which finalized 342.5 trillion won in expenditures at a Cabinet meeting on Tuesday, is set to submit the budget request to the National Assembly by Oct. 2, as required by the Constitution. The last thing that is required of the ruling and opposition parties is to increase the expenditures and, by doing so, widen the budget gap.
Instead, they will have to try to find out budgetary waste that may be hidden and eliminate it. They will also have to scale down big-ticket projects if they are not deemed urgent. It will not take long until the nation will follow the footsteps of Greece and Spain if no action is taken to put national debt under tight control.
Fiscal prudence cannot be overemphasized. After all, the relatively low level of indebtedness was the primary reason behind the recent upgrading of the nation’s sovereign credit ratings by the three major international ratings agencies.
Another caveat for the political parties: They will have to pass the budget bill by the Dec. 2 constitutional deadline, instead of passing it near or on the final day of the fiscal year, as they usually have done in the past. They will be given ample time for campaigns if they start to deliberate on the budget request as soon as it is submitted and pass it well ahead of the Dec. 19 presidential election.
