(EDITORIAL from the Korea Herald on Oct. 2) - Deficit spending

The opposition Democratic Party went too far when it warned of a fiscal collapse,
which it claimed President Lee Myung-bak's administration would experience unless
it overhauled its budget plans. It says "tax cuts for the rich" and four-river
and other big-ticket projects would produce a 200 trillion won deficit during the
remainder of Lee's five-year presidency.
A 200 trillion won deficit is either a hyperbole or ill-informed guesswork. It
cannot be based on a meticulous analysis. Still, few would dispute the opposition
party's observation that national debt is rising too fast.
In September last year, the Lee administration said fiscal deficits would total
31.7 trillion won through 2008-12. Now an updated 2009 to 2013 budget plan
foresees 142.2 trillion won. The pace at which fiscal deficits are newly
projected to increase is nothing short of alarming.
With the nation set to have a 51 trillion won deficit this year, national debt is
projected to break through the 400 trillion won mark next year. A deficit of such
a scope would be unthinkable were it not for the global financial crisis.
National debt as a percentage of gross domestic product, which stands at 35.6
percent this year, is projected to peak at 37.6 percent in 2011 and go down to
35.9 percent in 2013. Though the fiscal deficit is estimated to come down to a
manageable 6.2 trillion won in the final year of the five-year budget plan,
national debt will be approaching 500 trillion won in the same year.
The administration, which believes the budget can be balanced in 2013 or in 2014,
says not much damage will be done to the nation's fiscal prudence during the
five-year budget plan. It says national debt as a percentage of gross domestic
product will be manageable.
True, Korea is better positioned than many other member nations of the
Organization for Economic Cooperation and Development. The average national debt
of OECD member nations as a share of GDP, which lies somewhere between 70 percent
and 80 percent, is twice as large as that of Korea according to an estimate by
the Korean government.
Still, caution is advised. National debt estimates are based on what many
economic experts regard as rosy assumptions. The administration expects the
economy will expand a little more than 4 percent next year and 5 percent on
average during the 2011-13 period.
But the administration has yet to make a convincing argument in favor of 5
percent growth. That would be a difficult task, given that it was not easy to
generate such a level of growth even when economic conditions were much better
than now. Moreover, many nations will soon launch exit strategies, potentially
dampening the prospects of the world economy. That will spell trouble for Korea,
which depends on exports as an engine of growth.
Korea has good reason to keep away from costly populist policies and remain
fiscally prudent.
First of all, demographic changes will demand greater spending on welfare. Korea
is one of the fastest aging countries in the world. Back in 2005, eight
economically productive people supported one senior citizen. The number will be
reduced to three in 2030.
Another variable is a sudden change in inter-Korean relations. Reunification with
North Korea, should it come in the near future, would prove to be costly. The Lee
administration says it is meaningless to discuss reunification until after the
North's per capita GDP increases to $3,000 - a level South Korea reached in 1987.

Given the German case, however, reunification may be forced upon the South,
instead of taking place in the way Seoul prefers. As such, South Korea needs to
be fiscally prepared for such an unplanned event. There will be little room to
maneuver if national debt gets out of control.
(END)