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Silence of the bureaucrats

Nov 15,2019
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Yi Jung-jae
The author is a columnist of the JoongAng Ilbo.

The government and ruling Democratic Party (DP) have become spendthrifts. A presidential spokesperson said, “If you stack up money in the coffers, it gets rotten.” President Moon Jae-in emphasized that fiscal expansion during hard economic times was a “must,” not a choice. Deputy Prime Minister for the Economy and Finance Minister Hong Nam-ki joined the chorus by warning that government offices that did not fully spent their budgets could face “disadvantages.”

Who gives them the right to be so lavish with public finances? Would they be so prodigal if the money came out of their own bank accounts? There can be several reasons for this dangerous spending spree.

First, the powers that be have come to the awareness that our economy is in really bad shape. The president has persistently claimed that the economy was doing well over the last two years. In fact, it was going in the opposite direction. The Blue House was not entirely oblivious. Otherwise, the president would have not bent his principle as opposition leader that the national debt should not exceed 40 percent of the GDP.

Second, the hefty spending is aimed at winning more votes in the parliamentary election next April. If the economy turns bad in an election year, it will critically hurt the ruling party.

Third, using public finances to make up for policy failures has become a habit. Under the liberal administration, public finances are being used to obscure the damage done by steep rises in the minimum wage, the shortening of the workweek, overly generous health care, and a radical phasing out of nuclear energy. The government is subsidizing employers who cannot afford the sudden increases in their labor costs, giving monthly handouts to those who lost jobs, and creating temporary jobs for senior citizens to improve the employment figures.
Fourth, the massive costs of all this fiscal expansion can be dumped in the lap of the next administration.

A budget is a numerical reflection of a governing philosophy. A spending plan mirrors the priorities of the powers that be. The 2020 budget is a typical example of a spending binge by a heedless, leftist administration. The Finance Ministry has given up its duty as guardian of public finances. The national debt will stretch to 800 trillion won ($683.6 billion) next year and over 1,000 trillion won in 2023. The fiscal principle of keeping net public finances — which exclude the four social pension funds — at 3 percent of the GDP has been thrown out the window. The budget requested initially by the government’s offices amounted to 498 trillion won, but the Finance Ministry stretched it to 513 trillion won after giving into pressure from the Blue House and DP.

The budget office’s tradition of capping budget increases in a government office at 20 percent was broken. The budget for the Ministry of SMEs and Startups jumped 31.4 percent from this year. An official said he was surprised by the number, which was much more than the ministry asked for. “We now have to worry about failing to use it all.” The rule of balance was chucked away. By the time Moon finishes his term, Korea could become a deficit-ridden country.

Money cannot fix everything. Sometimes more harm can be done. Generosity to zombie companies can be damaging. According to the National Assembly Budget Policy Office, 12.3 percent of the companies in the materials, parts and technology segment, which received government subsidies in 2017, were “zombies” that survive on handouts and loans. Yet the Ministry of Trade and Industry doubled the budget for them to 602.7 billion won. If money goes to zombie companies, healthier ones can suffer because they can’t compete with the subsidized firms. According to a Korea Development Institute analysis in 2013, when the share of assets by zombie companies grew by 10 percentage points, hiring at normal companies went down by 0.53 percentage points and investment was pared by 0.18 percentage points. When the share of zombies falls by 10 percentage points through restructuring, jobs increase by 110,000.

How well public money is spent is even more important than how much. Moon likes to cite recommendations by the IMF that the government spend more. But what the IMF stressed was that public finances should be spent on structural reforms and strengthening of Korea’s growth potential. The poor states of Venezuela and Argentina are living proof of what becomes of fiscal profligacy unaccompanied by structural reforms. Debt-financed spending without restructuring is a ripping off of the savings of future generations.

The Finance Ministry should be an expert in this area. But it does not argue against today’s call for fiscal squandering. In the past, budgetary officials would guard public finances with their lives. Opposition parties are no better. They willingly compromise — if spending occurs in their constituencies. There are no brakes in sight. Korean coffers are thinning due to the impotence of leadership, recklessness of the ruling party and silence of the bureaucrats.