ed For fiscal health

Belt-tightening needed to reduce debts

The Lee Myung-bak administration has declared a goal of realizing a balanced budget in 2013. This goal reflects the government’s will to restore its fiscal soundness to the pre-2008 global crisis level. Now, the question is how to do it.

Policymakers have pledged to eliminate tax breaks and sell state assets to expand the revenue. Yet the government has to take bolder steps to achieve the goal. The best way is to reduce expenditure and collect more taxes. But this is easier said than done due to downside risks arising from the eruozone debt maelstrom and a looming double-deep recession in the U.S.

What’s for sure is that the nation cannot guarantee its fiscal health without slashing debts. However, the government has no plan to cut its debts. The amount of national debts is to rise to 435.5 trillion won ($369.3 billion) this year from last year’s 392 trillion won. It is expected to increase further to 448.2 trillion won in 2012, 460 trillion won in 2013, 466.6 trillion won in 2014 and 471.6 trillion won in 2015.

Budget planners argue that the increase will pose no problem because the ratio of debts to gross domestic product (GDP) is to decrease from 35.1 percent in 2011 to 27.9 percent in 2015. But, the expected fall is called into question since no one can ensure the continuing GDP growth in coming years. Late last month, the government disclosed a 326-trillion-won budget bill for 2012. The bill is based on the prediction that the economy may grow 4.5 percent next year.

Skeptics see the prediction as too rosy. Some private research institutes fear that GDP growth could fall below 4 percent in 2012 due to the deteriorating global economic outlook. If such a fear becomes a reality, the Lee administration has no choice but to suffer a budgetary and fiscal setback. For this reason the government should refrain from increasing the size of debts so that it can better cope with a slower economic growth.

We urge policymakers to adopt belt-tightening measures to prepare for a potential dive in tax revenue in case of an economic slowdown. Lawmakers of both ruling and opposition parties have already turned to populist policies of expanding welfare benefits. General elections and a presidential poll are scheduled for next year. Politicians are vying to offer more welfare programs and expand pork-barrel projects to woo voters.

Such political factors are likely to make it more difficult for the nation to regain its fiscal soundness. Having confidence in the economy is crucial to minimizing the fallout of external shocks. But excessive optimism without well-calculated measures may do more harm than good.