Budget Deficit Weighs on New Government
By Yoon Ja-young
Staff Reporter
President-elect Lee Myung-bak is inheriting a budget deficit of nearly 15 trillion won and 300 trillion won in national debt from the Roh Moo-hyun administration. The next government is tasked to fill the country's empty coffers but Lee's pledges to cut taxes have worried economists.
The fiscal balance, excluding national and other public funds, is expected to record a 14.8 trillion won deficit this year, up from a 4 trillion won deficit in 2004. On top of this, the national debt is expected to top 300 trillion won this year, growing 126 percent from 133 trillion won in 2002.
Lee's Grand National Party has been attacking the Roh government for ``driving state finances into bankruptcy.'' Economists, however, are raising concern that some of Lee's campaign pledges are likely to add to the already weak government finances.
Government spending has been expanding on increases in the number of government officials and on welfare spending. ``Around one third of the debt increase comes from foreign exchange market intervention amid the weakening dollar; and another third comes from the loss of public funds infused during the Asian financial crisis,'' explained Park Hyung-soo, head of the research coordination department at the Korea Institute of Public Finance.
Park said state finances are still sound compared with other countries, despite the recent rapid deficit expansion. The fiscal balance, excluding pension and other public funds, is estimated to be 14.8 trillion won in deficit this year, more than triple the 4 trillion won deficit in 2004.
Park said it will be difficult to cut spending in the next administration. ``Welfare spending goes hand in hand with aging. What matters is the pace of the increase, so it will be difficult to cut it.''
While economists points out the difficulties in cutting expenditure, Lee pledged to cut budget spending by 10 percent. He also gained votes by promoting tax-cutting policies. He promised to cut taxes on oil by 10 percent because of the soaring international oil prices. Sogang University professor Yi In-sill, meanwhile, criticized Lee's tax cut pledges in a forum Wednesday. ``Cutting taxes on oil for the working class is a populist tax policy that damages tax revenue while being of little help,'' she said.
The Ministry of Finance and Economy has also been opposing tax cuts over concerns about the financial deficit.
Economists advise that the controversial canal project should be approached very carefully, as it too could weigh on the fiscal account.