Tax revenues are projected to surpass this year’s target by 10 trillion won to 20 trillion won ― a blessing for a nation which had to borrow and spend its way out of the global financial crisis. With economic recovery gaining momentum, taxes collected during the first quarter increased by 4 trillion won from a year ago.
Now where to spend the surplus is an issue of contention between the administration and the main opposition Democratic Party.
The opposition party is calling on the administration to draw up a budgetary spending plan focusing on job creation. As one of its lawmakers, who used to be a budget minister, observes, it is the administration that has in the past been pushing for supplementary budgets in the face of strong resistance from the opposition.
But the administration plans to use the money to defray national debt. It has good reason to reject the Democratic Party’s proposal: National debt has increased by more than 100 trillion won since President Lee Myung-bak’s administration was inaugurated in February 2008. This should be a burden for Lee, though much of the money was spent on the economic recovery. Moreover, it is necessary to curb spending if it is to meet its goal of balancing revenues and spending in 2013 or 2014 and keeping the debt close to the present level ― 33.8 percent of gross domestic product.
In case of a budget surplus, the government has a statutory obligation to spend certain portions on subsidies to local administrations and debt amortization. The remainder, which, according to one estimate, will range from 3 trillion won to 7 trillion won this year, can be put to use for other purposes.
Against this backdrop, the opposition party is calling on the administration to submit a 6 trillion won supplementary budget aimed at creating jobs to the National Assembly. It says that such a spending plan would also make it easier for the central bank to raise its benchmark rate in its fight against inflation.
Rep. Kim Jin-pyo, floor leader of the opposition party, who claims that the central bank finds it difficult to raise the rate because a rate increase would be too much of a burden to households that are already heavily indebted. But, he says, the proposed spending on new jobs would offset the burden.
The central bank has made no direct comment on the proposed spending. Its governor recently said that the central bank would maintain a monetary policy that would not force household and business enterprises to borrow excessively.
But the central bank needs to raise its benchmark rate substantially if it is to rein in mounting inflationary pressure. One or two 25-basis-point baby steps will not suffice, if both the state-funded Korea Development Institute and International Monetary Fund are right in recommending that the rate be raised to 4 percent.
Currently, the benchmark rate is 3 percent. In its monthly conference on May 13, the bank’s Monetary Policy Committee kept the rate intact for the second consecutive month ― an action taken against the prevailing anticipation of financial market watchers.
The ruling Grand National Party is divided over how to use the budget surplus. Rep. Hwang Woo-yea, floor leader, once said it should be used to finance welfare programs of cutting university tuition, supporting child care and reducing housing costs for low-income families. But the party’s chief policymaker holds that it be used to reduce national debt.
As far as fiscal soundness is concerned, the administration will do well to avoid using the budget surplus to provide welfare because welfare programs, once created, are difficult to abolish. But the opposition party’s proposal for spending on job creation merits serious consideration as its funding can be more easily terminated when the economy improves.
