[Desk Column] How to Fill the Treasury for Generous Presidential Election Promises

Jeong Duhwan Managing Editor of Economic and Financial Division

'AA-.' This is the credit rating of South Korea announced by Fitch, one of the world's three major credit rating agencies, on the 27th of last month, just before the Lunar New Year holiday. Fitch also maintained South Korea's rating outlook as 'stable.' Despite global economic threats such as the Ukraine crisis and supply chain disruptions, Fitch superficially gave a relatively positive evaluation of the South Korean economy.

What draws more attention, however, are the risk factors Fitch mentioned regarding our economy. That is the 'presidential election.' Specifically, Fitch directly referred to the leading presidential candidates, Lee Jae-myung of the Democratic Party and Yoon Seok-youl of the People Power Party, stating that "both candidates are promising fiscal support," and pointed out that the election is bringing uncertainty to medium-term fiscal soundness.

Fitch's assessment reflects the perspective of global investors on the campaign promises of the leading candidates from both ruling and opposition parties. With just over a month left until the election, the two candidates are touring campaign sites and competitively announcing welfare pledges worth hundreds of billions to trillions of won almost daily. It has reached the point where people say it feels more like a "mayoral election" than a presidential one.

The government has already prepared a 14 trillion won one-point supplementary budget for small business owners last month. This is an unprecedented supplementary budget in January. Most of the funds will be raised through deficit bond issuance. Moreover, the political circles are pressuring to increase the supplementary budget from 35 trillion won to as much as 50 trillion won, making it highly likely that the budget will grow further. Considering the election is imminent, this can only be interpreted as a populist budget aimed at winning votes.

The country's finances have been worsening year by year due to the prolonged COVID-19 pandemic. The integrated fiscal balance, which recorded a surplus until 2018, turned into a deficit of 12 trillion won the following year and ballooned to 71 trillion won in 2020. Last year, the deficit was initially expected to reach 90 trillion won, but thanks to higher-than-expected tax revenues such as real estate holding taxes, the deficit stood at about 22.4 trillion won as of the end of November, which was somewhat fortunate. However, fiscal deficits are expected to continue for the foreseeable future. According to the National Fiscal Management Plan submitted by the government to the National Assembly, deficits exceeding 64 to 72 trillion won annually are projected from next year through 2025, following this year's 68 trillion won deficit.

Adding the cash payment pledges of the leading candidates from both parties will inevitably cause the fiscal deficit to increase sharply. Especially, even if COVID-19 budgets such as support for self-employed workers are considered temporary, once money is distributed, it is difficult to retract, and such spending pledges place a heavy burden on the country's medium- to long-term finances.

Since the beginning of the year, voices expressing concern about the worsening domestic and international conditions of our economy have been pouring in. Although exports, which support the economy, have increased, imports have surged, resulting in a trade deficit, and inflation is soaring. Tensions between the U.S. and Russia over Ukraine are escalating, causing oil prices to spike. Amid forecasts that the economic growth rate, which held up at 4% last year, will significantly slow this year, and with interest rates rising sharply, the liquidity party that supported the stock and real estate markets is coming to an end. Some even warn that we have entered a stagflation phase, where economic recession and inflation occur simultaneously.

In this situation, looking at the candidates' pledges, promises to fill the treasury are vague. They are full of abstract expressions such as fostering new growth engines, nurturing future talents, and creating jobs led by the private sector. This contrasts with the concrete spending pledges. Moreover, many pledges from candidates of both parties raise concerns that they may dampen corporate economic activity. If the private economy shrinks, naturally, the state's revenue, which depends on taxes, will also decrease. What happens if expenditures increase while revenues decrease? The answer is simple. The economy collapses, and someone has to bear the burden of that debt.

We have already witnessed countless cases of economic collapse caused by political populism. Can we confidently say that the end of populist policies pandering to popularity will not be like Greece or Venezuela?