[Viewpoint] Three Years of Tightened Expenditure Restructuring

Last May, the global credit rating agency Fitch stated, "South Korea is no longer a credit rating powerhouse in public finance" and emphasized the "need for efforts to curb debt." One of the strengths of the South Korean economy in the past was fiscal soundness. The ratio of national debt to South Korea's gross domestic product (GDP) was below 40%, which helped maintain the country's creditworthiness. During the global financial crisis, a healthy fiscal situation played a significant role in the rapid economic recovery.

However, South Korea's current fiscal soundness is not very optimistic. Since the government was established in 1948, the accumulated national debt was 660 trillion won until 2017, but it ballooned to 1,076 trillion won over the five years of the Moon Jae-in administration. Even considering the special circumstances of the COVID-19 pandemic, the increase of over 400 trillion won in national debt has been widely criticized as a result of reckless fiscal management.

On the 27th of last month, the government announced a 677 trillion won budget plan for the next year. This amount is 3.2% higher than this year's main budget and was prepared within the fiscal rules the government is pursuing. The ratio of national debt to GDP was also restrained to 48.3%, an increase of only 0.8 percentage points compared to this year. In short, it is a 'high-intensity austerity' measure.

The most noteworthy aspect is the restructuring of expenditure. The government restructured 24 trillion won worth of budget expenditures. This marks the third consecutive year of restructuring 23 to 24 trillion won annually. This is double the amount of 10 to 12 trillion won per year restructured during previous administrations.

Expenditure restructuring involves reducing habitual and inefficient projects, which requires considerable pain across all ministries. In this process, the Ministry of Economy and Finance, which drafts the budget, often plays the role of the villain. Having conducted intense expenditure restructuring over the past two years, this time they had to reduce not only discretionary spending but also rigid expenses. It is said that each government ministry was truly 'wringing out a dry towel.'

On the other hand, expenditures were reduced by improving the efficiency of fiscal projects involving inter-ministerial collaboration. Projects linked across multiple ministries were bundled and invested intensively at the same time to achieve results in a short period. For example, in the regional themed tourism revitalization project, the Ministry of Oceans and Fisheries handles port and fishing village-related projects, the Ministry of Patriots and Veterans Affairs manages the construction of memorial facilities, the Ministry of the Interior and Safety develops bicycle paths, and the Ministry of Culture, Sports and Tourism invests in tourism product development simultaneously to shorten the project duration.

The budget saved in this way is mainly invested in support for the elderly, disabled, and vulnerable children, research and development (R&D) support, expansion of essential medical services and restoration of regional healthcare, national defense, public safety, and natural disaster response.

The government's efforts in expenditure restructuring are difficult for the public to directly perceive. However, it is necessary to look closely at how large the burden of national debt currently is. National debt is expected to exceed 1,195 trillion won by the end of this year. Assuming an annual interest rate of around 3%, nearly 100 billion won must be spent daily just on interest payments. With the ongoing low birthrate and aging population, national debt is bound to increase at an even faster pace.

It is natural for national debt to increase as the economy grows, but there are criticisms that fiscal management has been too passive. This too requires a virtuous cycle of fiscal input effects. If companies grow and pay more taxes, and citizens' incomes and assets increase leading to higher tax payments, fiscal soundness can be maintained at an appropriate level. The government must not stop efforts to allocate fiscal resources appropriately to sustain this virtuous cycle.

The saying "It's not that the country has no money, but that there are many thieves" likely spread because of inefficient fiscal spending and neglected misallocated budgets. Going forward, thorough expenditure restructuring must continue. Among the economic policies of the Yoon Suk-yeol administration, the one that will receive the best evaluation in the future will likely be sound fiscal management.