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Restructuring campaign pledges

Posted January. 15, 2013 01:37,   


The incoming Park Geun-hye administration has made 252 pledges to be implemented with taxpayers’ money. Unless viable financing options are found, the pledges could go delinquent after the new president begins her term next month. The Strategy and Finance Ministry pledged to the presidential transition committee to come up with measures to fund the pledges by this month. Huge financial resources for numerous pledges, however, cannot be prepared in less than a month.

Another 135 trillion won (127.8 billion U.S. dollars) is needed to make the president-elect’s pledges happen, or 27 trillion won (25.5 billion dollars) per year. When certain ministries felt reluctant about implementing her pledges, she was seen as uncomfortable. Understandably, she has a strong determination to keep her pledges because of her reputation as a politician who keeps her promises. Implementing slap-dash pledges, however, will bankrupt the government. The president-elect and her transition committee should listen to other voices including that of the ruling party. Keeping pledges is good but an exit strategy should be considered in dealing with a large budget that is not so viable.

The president-elect and her transition committee said they will prepare financial sources of more than 27 trillion won (25.5 billion dollars) per year by reducing unnecessary spending and increasing revenue, but can they do this? This year’s welfare budget will exceed a record 100 trillion won (94.6 billion dollars) because the ruling and opposition parties raised the amount to implement campaign pledges and added the so-called Park Geun-hye budget, or funds for halving university tuition and free childcare. Other pledges that require more than 1 trillion won (946.8 million dollars) are lining up, including a raise in basic old-age pension benefits and a cut in the mandatory military duty period. A number of other pledges promise tax cuts such as a gas tax cut for the bus industry, tax benefits for mid-size companies, and extension of the reduction of the real estate acquisition tax. Critics say this is like stepping on the accelerator and brake at the same time. To implement pledges with limited resources, the number of pledges should be reduced and prioritized.

Another task is to minimize the side effects of pledges. The president-elect promised to form a "National Happiness Fund" worth 18 trillion won (17 billion dollars) to reduce the debts of credit delinquents who want to get themselves out of trouble or help them change to low-interest rate loans. The fund would also 100-percent coverage of the treatment costs for four major serious diseases -- cancer, heart disease, rare illnesses and cerebral vascular disease. The policies seeking to help credit delinquents first should neither cause moral hazard to make people think they do not have to repay debt nor deteriorate the financial conditions of the national health insurance by creating fictitious demand to encourage people to flock to hospitals.

The Bank of Korea forecast that economic growth this year will reach 2.8 percent, short of the government’s outlook of 3 percent. To achieve the revenue goal of 204 trillion won (193.1 billion dollars) will prove challenging. If the National Tax Service squeezes revenue sources, the economy could be constrained and money will go underground. The tax watchdog claims that it can raise a maximum 6 trillion won (5.68 billion dollars) per year if it can use cash transaction data of the Korea Financial Intelligence Unit, or FIU. Given that tax officials wielded power through audits under previous administrations, the framework of the real-name financial transaction law or the protection of an individual`s financial information could be compromised. If the tax service wants to increase the scope of its access to documents, the data of individuals should be clearly protected and the tax watchdog should remain politically neutral.

An increase in the welfare budget is inevitable to alleviate conflicts stemming from the widening wealth gap and weakening growth potential due to Korea`s low birth rate and rapidly aging population. The Korea Institute of Public Finance says the low birth rate and fast-aging society will raise the government’s debt ratio to the levels of Southern European countries by 2050. Instead of universal welfare, the new administration should increase the efficiency of welfare spending with selective and productive methods to strengthen the social fabric by offering childcare or job support. It should revisit the pledges and the budget based on the principle of fiscal health and the efficiency of the welfare delivery system. The new government should show political leadership that sticks to the principle of high welfare, high burden and pain sharing with increased taxes so that it can dodge the curse of pledges.