[Insight & Opinion] The Dark Side of Fiscal Soundness: Attention Must Be Paid to the Suffering of the Elderly

President Yoon Suk-yeol emphasized the need for fiscal austerity on the 1st, stating, "If we increase the budget further, ordinary people will suffer again due to inflation," and cited the International Monetary Fund (IMF)'s evaluation as evidence supporting the validity of the austerity policy. On October 29, Thomas Helbling, IMF Deputy Director for Asia-Pacific, praised "the intent and actions of South Korea's fiscal consolidation policy," noting that "the current level of national debt in South Korea is generally appropriate and should be maintained as is." The issue of fiscal soundness should be approached not as an ideological matter but as a matter of intergenerational burden sharing, and in that regard, President Yoon's remark that debt should not be passed on to the next generation is absolutely correct.

The country that has fallen into an irreversible debt swamp by passing debt onto the next generation is Japan. Japan's social welfare expenditure as a percentage of gross domestic product (GDP) increased from 13.87% in 1995 to 16.09% in 2000 and 24.9% in 2020. During the same period, the ratio of fiscal deficit to GDP rose from 94.7% to 132.8% in 2000 and 257% in 2020. As a result, interest on government bonds accounts for one-quarter of the central government's budget. Despite the expansion of social welfare spending by the Japanese government, the relative poverty rate of those aged 66 and over (those earning less than 50% of median income) remains at a significant level. What would the current state of Japan's economy be if the Japanese government had adhered to fiscal soundness principles and had not significantly expanded social welfare spending?

South Korea's social welfare expenditure to GDP ratio was 14.8% as of 2022. This is not only significantly lower than the OECD average of 21.1% but also ranks fifth from the bottom. The fiscal deficit to GDP ratio stands at 54%, considerably lower than the OECD average of 89% (2021). The problem is that the elderly poverty rate is 0.40 (2020), double that of Japan and the highest among OECD countries. Nevertheless, the government is demanding 'self-reliance' from the elderly to secure fiscal soundness. If the government does not expand social welfare spending for the elderly to ensure fiscal soundness, what will the relative poverty rate of the elderly be in 2040? It is nothing short of a terrifying prospect. Therefore, the fiscal soundness policy is clearly correct for the present but wrong for the future.

Another issue underlying the fiscal soundness policy is that the government refuses to use fiscal spending as a macroeconomic adjustment tool. The contribution of the government sector to GDP growth this year was 0.1 percentage points in the first quarter, -0.4 percentage points in the second quarter, and 0.0 in the third quarter, making it highly likely that the annual figure will be negative. Of course, expansionary fiscal policy for economic adjustment risks stimulating inflation and causing fiscal waste. However, if the government abandons the function of economic adjustment through fiscal spending, does that mean the suffering of the lower-income class due to economic contraction should also be left to self-reliance?

If the government sets securing fiscal soundness as a national goal, it should first reorganize to prevent the temporary increase in spending during the COVID-19 period from becoming a permanent practice. Fiscal reform is also needed to flexibly adjust local transfer expenditures such as local education finance grants, which account for 44% of mandatory spending. Along with discussions on reforming the National Pension, reform of public pensions should also be pursued.

The current government's stance that sound fiscal policy is necessary to avoid passing the debt of the current generation onto the next is correct. However, the policy of maintaining fiscal soundness must not become a modern-day 'Goryeo Jang' (a cruel practice of abandoning the elderly). Before cementing the principle of fiscal soundness, the government should seek the optimal long-term combination between securing fiscal soundness and expanding the social safety net, present the solution to the public, and obtain consensus.

Kim Dong-won, Former Visiting Professor at Korea University