The administration promised to halve the fiscal deficit next year and balance the budget in 2013 when it sent its 2012 budget bill to the National Assembly on Oct. 2. But it looks extremely difficult for the administration to make good on its promise.
As a consequence of its earlier decision to spend its way out of the 2008-09 global economic crisis, the administration targeted a budget deficit of 25 trillion won for this year and 12.3 trillion won for 2012. Then it committed itself to producing a budget surplus, albeit modest at 200 billion won, in 2013.
But the promised return to fiscal prudence in 2013 is now in question, as economic think tanks are revising their growth forecasts for the nation downward and rival political parties are scrambling to increase spending. Both the administration and the political community must be held accountable if the nation fails to pull itself out of budgetary deficit.
The 326 trillion won budget for next year is based on an unrealistic assumption that the Korean economy will grow 4.5 percent in 2012.
The Korea Development Institute, a state-funded think tank that believed in May that growth would be 4.2 percent next year, has recently revised its forecast to 3.8 percent. More pessimistic are private think tanks, including the Samsung Economic Research Institute, which says growth will fall to 3.6 percent ― almost a full percentage point lower than the administration expected.
Slower growth means a decline in revenues, which in turn translates into a deficit expansion. It also calls into question the administration’s commitment to balancing the budget in 2013.
The administration, which is not as sanguine about the nation’s economic prospects as it was when it drew up the budget, has yet to revise its growth forecast, reflecting the impact of the eurozone crisis on the global economy. Of great concern to top economic policymakers is undoubtedly an anticipated shortfall in revenues.
Another threat to fiscal prudence is coming from the National Assembly, whose members pay little attention to the worsening economic outlook and demand an increase in spending on welfare and construction.
The National Assembly has no statutory obligation to cut the administration-proposed expenditures. Under public pressure, however, the special committee on budget and accounts pared the spending plan, albeit by a cosmetic amount, when it cut the 2011 budget request by 500 billion won last year.
It is rare for the legislature to mandate an increase over the administration’s budget request. But this possibility cannot be ruled out this year, given the unusually strong demands for spending increases from individual lawmakers and their parties, who are becoming populist ahead of the April parliamentary elections.
At standing committees, it is far from unusual for lawmakers to agree on spending increases. They do so although they are well aware almost all increases will be removed when they are put under the scalpel of the special budget committee. They demand spending increases on welfare programs and local projects, mostly for the record, so that they can blame the special committee for slashing them when they report to their constituencies.
Even so, the increases made at standing committees this time were too great ― 11.5 trillion won, a 3.4-fold jump from last year. Worse still, the ruling Grand National Party is moving to demand an overhaul of the budget bill in favor of welfare. The main opposition Democratic Party is also demanding an increase in welfare spending.
The administration has little room for maneuver. If it wishes to make good on its promise to cut the 2012 fiscal deficit by half and balance the budget in 2013, the administration will have to bargain hard with the special budget committee.
If the demand for more spending on welfare cannot be resisted, the administration may even have to consider agreeing to deep cuts in defense and other programs that it has regarded as sacrosanct in the past. The nation cannot be allowed to follow the footsteps of the crisis-ridden European countries that have been living beyond their means.
