Go to contents

Public sector`s runaway spending

Posted April. 11, 2011 23:46,   


The employees’ welfare budget, which staff at the 25 autonomous ward offices of the Seoul city government can use like cash apart from their salaries, is 76.5 billion won (70 million U.S. dollars) this year, up 13 percent from 67.9 billion won (63 million dollars) last year. This translates into more than 2 million won (1,800 dollars) per city worker a year. Despite having objected to a reduction of real estate acquisition taxes by citing its mounting fiscal deficit, the wards raised the employees’ welfare budget. Individual wards raised the budget freely at their own discretion, so per-capita amount of this budget at one ward was several times more than that for an employee at a central government agency.

Ward chiefs said on April 1 that if the central government slashes the acquisition tax 50 percent to help stimulate housing transactions, the fiscal balance of municipal and provincial governments could go from bad to collapse, urging the central government to nix the tax reduction. Metropolitan and provincial governments and their councils also warned that a tax cut will make it impossible to run autonomous governments. As a result, the central government and the ruling Grand National Party will reimburse the deficit of 2 trillion won (1.8 billion dollars) expected from the tax cut from the state coffers. However the financing is sourced, taxpayers will ultimately bear the cost.

Complaining over lack of tax income, civil servants at autonomous governments are wasting tax money as if the funds have no owner, an act that constitutes serious moral hazard. Incheon City spent 120 million won (110,000 dollars) to purchase new official vehicles for the mayor and two deputy mayors. If Incheon Mayor Song Young-ghil had to spend his own money, would he have replaced official vehicles bought in 2006 and 2009? Even without such lavish spending, the city government has debts of nearly 8 trillion won (7.37 billion dollars) and its combined debt is projected to surpass 10 trillion won (9.2 billion dollars) next year. Reckless and wasteful spending by mayor and deputy mayors is easily spread to rank-and-file civil servants and can be used as excuses.

Debts owed by state-run companies, which the government should repay on their behalf, have increased at an alarming pace. The combined debts of the 27 designated state-run companies reached 272 trillion won (250 billion dollars) late last year, up 34 trillion won (31 billion dollars) from the previous year. If state-run companies take up unprofitable government projects and have their debts snowball, the central government will end up compensating their losses with taxpayers’ money, creating a vicious cycle. State-run companies do not run contractionary budgets because of no danger of bankruptcy even if they incur accumulating debts. They are fine as long as they follow the central government`s instructions. The head of a state-run company said, “If we work hard to improve our management, we can generate profit. But even if we try and increase our profit by tens of millions of dollars, no one will acknowledge us for it. Meanwhile, employees demand more pay and we often end up spending money on employee welfare and benefits instead of increasing profits.”

Korea`s national debt was 393 trillion won (360 billion dollars) last year, 33.5 percent of GDP. This rate might be lower than those of advanced economies, but when including debts owed by state-run companies, Korea`s fiscal soundness is far from assured. The outstanding balance of bonds issued by state-run companies, which the central government should compensate in case of deficit, increased from 91 trillion won (84 billion dollars) in 2005 to 235 trillion won (220 billion dollars) late last year. If the government bears the debts of state-run companies on top of deficits from public health insurance and pensions for civil servants and military veterans, there is no guarantee that Korea will not face a fiscal crisis like that of Southern Europe.