The government is planning to introduce pay-as-you-go, or PAYGO, budgeting rules to maintain fiscal soundness by preventing political parties from recklessly passing costly welfare bills.
The Ministry of Strategy and Finance said it would seek to revise the law on state finances during the ongoing parliamentary session to bring the rules into effect next year.
PAYGO is the practice of financing new spending commitments with currently available funds rather than fresh debt. Under the rules, a new legislative proposal must be funded by cuts to other programs, by revenue increases through tax hikes, or by a combination of the two.
The government is rushing to introduce PAYGO as a rapid increase in welfare spending is threatening to not only undermine the nation’s fiscal health but also severely restrict fiscal flexibility.
According to the recently unveiled National Fiscal Management Plan for 2013-17, the government debt is forecast to top 500 trillion won next year and 600 trillion won in 2017. When the liabilities of public corporations and local governments are added, public sector debt is projected to exceed 1,100 trillion won this year.
The main driver behind this rapid debt growth is a surge in welfare spending. At the moment, the government prefers debt financing to tax hikes when it has to pay for new welfare programs that go beyond its budget.
Increased welfare spending also limits fiscal flexibility by boosting the portion of mandatory spending in the government budget. In 2014, mandatory spending will amount to 168.8 trillion won, 47.2 percent of overall expenditure. The share is projected to reach 51.7 percent in 2017.
Mandatory spending could further increase, limiting fiscal authorities’ room for maneuver, if lawmakers are allowed to continue their practice of writing bills aimed at spreading government largesse among voters.
In this regard, the move to put in place strict budgeting rules is a step in the right direction. We hope the ruling Saenuri Party and the main opposition Democratic Party throw their full weight behind the plan and help establish stringent fiscal discipline.
In promoting legislation of the PAYGO rules, the government and the main political parties must take care not to allow too many exceptions.
Exceptions are necessary to ensure that the rules do not stand in the way of introducing expansionary fiscal measures aimed at sustaining economic growth. But too many exceptions would make the rules look like a slice of Swiss cheese.
PAYGO has proved its effectiveness in balancing the budget in the United States. In 1991, the federal deficit amounted to 4.5 percent of GDP. This turned into a 2.4 percent surplus in 2000. The turnaround was largely due to strict budgeting rules legislated in 1990.
The experience of the United States strongly suggests that the PAYGO rules, if strictly followed, will help Korea rein in legislative populism and excessive spending.
