Yoon Administration Pushes Reduction of Legally Mandated 'Mandatory Spending'

Measures to Restructure Mandatory Spending Likely to Be Prepared in the Second Half of the Year

[Asia Economy Sejong=Reporter Kwon Haeyoung] The Yoon Seok-yeol administration is considering restructuring 'mandatory expenditures' that are legally fixed and cannot be arbitrarily reduced by the government. Given the rapid decline in birth rates and aging population, government spending is inevitably expected to continue increasing, so the aim is to prevent deterioration of fiscal soundness. However, since most mandatory expenditures are concentrated in the welfare sector, there are also views that it may be difficult to present meaningful reduction plans.

According to the Ministry of Economy and Finance on the 24th, they are reviewing parts of mandatory expenditures where reductions are possible. It is known that they are considering presenting a plan for restructuring mandatory expenditures and rigid discretionary expenditures in the second half of this year.

An official from the Ministry of Economy and Finance said, "The new government has a strong will to restructure even mandatory expenditures to strengthen fiscal soundness," adding, "We are examining which parts of mandatory expenditures can be reduced." Another official from the ministry said, "To implement national tasks, it is necessary to reduce existing expenditures," and "We are reviewing from the ground up whether mandatory expenditures can be reduced."

Mandatory expenditures are budgets specified by law that the government cannot reduce at its discretion. These include basic pensions, national pensions, health insurance, and local education finance grants. The Ministry of Economy and Finance has already taken steps to improve the efficiency of mandatory expenditures by mandating measures such as utilizing the next-generation social security information system and preventing fraudulent social security benefit claims through additional guidelines for the 2023 budget formulation. Discussions on reforming and reducing education grants can also be seen as part of the ministry’s ongoing plans to reduce mandatory expenditures.

According to government statistics, the proportion of mandatory expenditures in the main budget is increasing. It was 49.5% in 2018, 49.4% in 2019, and dropped to 46.0% in 2020, but rose again to 47.7% in 2021 and reached 49.9% in 2022 (2018?2020 figures are final accounts, 2021?2022 are main budget figures). The more serious problem is that mandatory expenditures are expected to increase even faster due to rapid population aging. According to the '2021?2023 Medium-Term Fiscal Outlook' released by the National Assembly Budget Office, the ratio of mandatory expenditures to GDP is expected to rise from 13.9% in 2021 to 16.0% in 2030. This leads to an increase in national debt, placing a burden on fiscal soundness.

Some expect that it will not be easy for the government to reduce mandatory expenditures set by law. Professor Park Hoon of the Department of Taxation at Seoul City University said, "Mandatory expenditures are mainly in the welfare sector, so reductions are difficult, and conservative administrations, which are relatively stingy with welfare policies, face significant political burdens," adding, "Even if the government manages to prepare a mandatory expenditure reduction plan, it will be difficult to pass the bill in a divided National Assembly, so it is expected that efforts will be quite limited to finding areas where budget waste can be reduced."

Ultimately, alongside reducing mandatory expenditures, there are calls to broadly consider measures such as expanding tax revenue through reducing tax exemptions and deductions, and devices to block future expansions of fiscal laws by the National Assembly. The introduction of a 'pay-as-you-go' system, which requires securing funding measures such as expenditure reductions when the National Assembly proposes bills involving mandatory expenditures, could be an alternative.

According to the National Assembly Budget Office, fiscal laws passed by the National Assembly last year are expected to reduce government revenue by an average of 6.9742 trillion won annually and increase expenditures by an average of 7.6641 trillion won annually over the next five years. Among these, mandatory expenditures are estimated to increase by about 3.441 trillion won annually, with social welfare expenditures increasing the most at 2.3871 trillion won annually. For example, the introduction of infant allowances and expansion of child allowance recipients are expected to increase annual expenditures by 2.0684 trillion won, and the payment of 2 million won per newborn child as a First Meeting Use Voucher is expected to increase expenditures by 501.7 billion won annually.