Universal welfare and its costs
Director of the Division of Planning and Coordination, Korea Economic Research Institute
Last November the National Assembly approved a bill that requires the government to fully subsidize the costs of child-care for all children between 0 and 2 years old. As a result of this bill, parents with children under the age of 3 do not have to pay for their child’s day-care services regardless of their income levels. This policy is a part of ‘universal welfare’ because it is not only for the poor, but also for the rich. But what is the result of this policy?
According to news reports, 16 local governments asked the central government to fully compensate their expenditures on free child-care due to the fear that the budget for child care would be depleted. Without compensation from the central government, they argued that most of the local governments would be on the verge of bankruptcy. The notion that local governments would go bankrupt might be overblown, but this shows the seriousness of the fiscal burden on local governments derived from the free child-care policy.
The child-care policy is just one example of the recent trends on welfare policies among Korean politicians. Most politicians insist that welfare expenditures should be expanded and that all people should benefit from the government welfare programs. They especially focus on the expansion of universal welfare. In addition to the existing universal welfare programs such as national pension and national health insurance, politicians argue that the universal welfare should be extended to the new areas such as education, medical care, school lunch and child care. They insist that free education, free medical care, and free child-care services should be provided to all people by the government. Their ultimate goal is to transform Korea into a welfare state similar to European nations.
Is universal welfare the spirit of the current age? It might be a popular trend of the current age, but it is not the proper direction for Korea because it is not truly free. There are no free lunches. Someone has to pay for it. Thus, the government has to raise the tax rates to finance the welfare expenditures. As we have seen in the case of local governments financially burdened by free child-care bill, the expansion of free universal welfare programs will hurt the fiscal soundness of both local and national government.
In order to finance the universal welfare system, raising the taxes for the rich alone will not be enough. Even the poor would have to pay more taxes. If the welfare program was instead designed only for the poor and efficiently implemented, the poor would not need to pay additional taxes. But under the current universal welfare system, the poor will also pay taxes to finance the welfare for the middle-income earners. The universal welfare system will make the government take away resources from the poor and give these to middle class. This is the outcome of the universal welfare system. Raising taxes for universal welfare programs will discourage the incentives to work and invest. This will limit economic growth and creation of jobs. Then more people will become dependent on welfare. It is the vicious cycle of universal welfare.
Also arguments for universal welfare so far are based on the assumption that the universal welfare system can be financed by only raising taxes. However, it is not easy to raise tax. Sometimes it is impossible to raise tax rates politically. In this case, government should issue the bonds or print more money. But this method will not be sustainable and hurt the fiscal soundness of the government. The fiscal crisis in eurozone nations such as Greece and Italy resulted from the expansion of universal welfare without raising government revenues.
The tax hike for the universal welfare will curb the growth of the Korean economy. The introduction of the universal welfare system without raising taxes will hurt the fiscal soundness and lead to the path to Greece or Argentina. Why should we choose the road to serfdom?