[Insight & Opinion] While Setting Fiscal Rules, Why Are There No Welfare Goals?

Controversy is unfolding in the National Assembly over the legalization of fiscal rules. Both the ruling party, which argues that the establishment of fiscal rules is necessary to reduce the burden on national debt, and the Democratic Party, which opposes the introduction of fiscal rules as a way to stigmatize the Moon Jae-in administration’s reckless fiscal spending, are at odds with the welfare of the people.

Fiscal rules are a system that legally stipulates fiscal management targets in numerical terms, thereby imposing continuous constraints on fiscal policy. They are institutional measures designed to minimize the repayment burden of accumulated national debt passed on to future generations. Therefore, the introduction of fiscal rules itself is reasonable. However, there are issues that must be addressed before enacting fiscal rules.

As of 2021, South Korea’s per capita Gross Domestic Product (GDP) stands at 96% of the average of the Organisation for Economic Co-operation and Development (OECD), but the citizens’ “life satisfaction” scores only 5.9 out of 10, lower than the OECD average of 6.7, ranking third from the bottom among 38 countries. South Korea’s social welfare expenditure as a percentage of GDP (2022) is 14.9%, significantly trailing the OECD average of 21.1%, ranking fifth from the bottom.

Let us examine a more uncomfortable truth. Forty-three percent of elderly people aged 65 and over have no retirement preparation, and 27.4% of retirement preparation depends on the National Pension, yet 53% of old-age pension recipients receive less than 400,000 won per month. The proportion of public pension income in the income of the elderly in South Korea is 29.7%, whereas in Japan it reaches 63%. Conversely, the proportion of earned income is significantly higher in South Korea at 42.8%, compared to Japan’s 30.5%. The employment rate of those aged 65 and over is 34.9%, starkly illustrating the harsh reality of elderly people who cannot rest even as they age.

According to the National Fiscal Management Plan, the managed fiscal balance is planned to have a deficit ratio of 2.6?2.2% of GDP from 2023 to 2026, and the national debt ratio is planned to be 52.5% in 2026. The medium-term fiscal outlook reviewed by the National Assembly Budget Office, which examined the validity of this plan, estimates an average annual growth rate of 4.7% for government mandatory expenditures and 6.6% for welfare expenditures from 2023 to 2031. This expenditure plan is likely the best plan made within the scope of minimizing the burden of passing national debt to future generations. However, fiscal rules impose long-term constraints on fiscal spending, making it difficult to achieve a breakthrough improvement in welfare spending. There are alternatives. To increase welfare spending for the current generation without passing the burden to future generations while actively promoting the welfare of the people, a major tax reform and fiscal reform must be implemented, including raising value-added tax and readjusting fiscal expenditures to redistribute burdens and spending among the current generation.

Is it truly impossible for our citizens to receive welfare benefits at the OECD average level? Why does the government set targets for the national debt ratio but not for the welfare expenditure ratio? South Korea is already facing a growth crisis due to a decline in potential growth rate. All the more reason not to leave the people’s lives as they are. We must not only establish fiscal rules but also set welfare goals. Economic growth is meaningless if the quality of life of the people does not improve. If we cannot give hope that the quality of life will improve for the next generation, what use is it to establish and adhere to fiscal rules? The government and the National Assembly should stop making empty promises about people’s livelihoods and, before it is too late, find alternatives that truly improve the quality of life and give hope to the people.

End.

Kim Dong-won, Former Visiting Professor at Korea University