ED Shift to fiscal austerity

Reducing debt crucial to sustainable growth

The Yoon Suk-yeol administration has decided to adopt a set of measures to reduce the fiscal deficit and national debt in order to recover fiscal health. The decision marks a shift to a belt-tightening policy from the previous government's fiscal expansion.

Yoon issued a warning against the nation's snowballing fiscal deficit during a fiscal strategy meeting held at Chungbuk National University in Cheongju, North Chungcheong Province, July 7. He said it is wrong to believe that the economy will grow and people's livelihoods will improve automatically if the government increases its spending.

He stressed the importance of austerity to overcome a looming fiscal crisis. He also implied that the previous Moon Jae-in administration's expansionary policy had gone so far as to hurt the government's fiscal health, which could jeopardize sustainable economic growth. Now is the time for all constituents of the economy ― government, businesses and households ― to tighten their belts amid fears of stagflation, a mix of economic stagnation and high inflation.

To back up Yoon's policy, the Ministry of Economy and Finance announced a plan to cut the fiscal deficit to a level equivalent to less than 3 percent of the gross domestic product (GDP), from an estimated 5.1 percent for this year. It also plans to lower the ratio of national debt over GDP to the mid-50 percent level by 2027. These measures should be implemented in good faith to restore fiscal health.

Putting the fiscal policy into an austerity mode is a step in the right direction. The national debt has surged 61.6 percent over the past five years ― from 660.2 trillion won ($502.2 billion) in 2017 to 1,067.3 trillion won this year. The debt-to-GDP ratio has also skyrocketed from 36 percent to 50 percent in the same period. To a certain degree, it was inevitable for the Moon government to increase budget spending and issue more state bonds to finance COVID-19 relief programs, cushion the subsequent economic shock and create more jobs. However, excessive debt could dent Korea's sovereign ratings and lead to a capital outflow.

The previous liberal administration was under attack for its belief that a big government could address all the problems facing the nation through drastic fiscal expansion. Its expansionary policy had contributed to riding out the unprecedented public health crisis and propping up the economy. But it is also true that a large part of the increased budgets and debt were used for pork-barrel projects and populist welfare programs. That was apparently a waste of taxpayers' money for political purposes.

Now it is natural for the new administration to change the course. Yet achieving fiscal sustainability is easier said than done. First of all, the government should speed up restructuring of expenditure to improve the fiscal balance. It is also urgent to enact a law to enforce a stricter fiscal rule. The Yoon administration needs to push for reform of state enterprises and public organizations to reduce their operational costs and monetary losses. The tight fiscal policy should be in lockstep with monetary tightening to tame runaway inflation.