Fiscal Rules Lost Their Way Amid Political Controversy

Ruling and Opposition Diverge... Emphasis on 'Flexibility' Over Compulsory Measures
System at Risk of Becoming Meaningless

Deputy Prime Minister for Economy Hong Nam-ki and Kim Tae-nyeon, floor leader of the Democratic Party of Korea, are attending the 2021 budget formulation party-government consultation held at the National Assembly on the 26th, talking during the meeting. Photo by Yoon Dong-joo doso7@

[Asia Economy Reporter Jang Sehee] As the government plans to announce fiscal rules by the end of this month, concerns are emerging that the system, focusing more on flexibility than enforceability, might end up being ineffective. Particularly, with differing opinions in the political sphere regarding the establishment of fiscal rules, including all viewpoints could lead to confusion in fiscal management.

According to the Ministry of Economy and Finance on the 16th, the government will finalize and announce fiscal rules around the 28th that include provisions to appropriately monitor the national debt ratio and fiscal deficit. A government official stated, "The opposition party insists on introducing strict fiscal rules, while the ruling party is concerned that strict fiscal rules could restrict the role of fiscal policy," adding, "We are working on a direction that satisfies both sides."

The government is reportedly leaning towards adding certain provisions to existing laws such as the National Finance Act rather than creating a new law. The opposition party advocates for legally setting a numerical ceiling on the national debt ratio and mandating a plan to reduce national debt over five years. On the other hand, the ruling party emphasizes balancing the fiscal deficit and securing fiscal capacity to prepare for greater crises. To satisfy both parties' demands, it is highly likely that the law will have some degree of binding force but will include declarative statements without specifying concrete numerical ceilings.

In 2016, the Ministry of Economy and Finance submitted a bill to the National Assembly to legislate fiscal soundness measures, managing the national debt at within 45% of GDP and the structural fiscal deficit within 3% of GDP, but the discussion was discontinued and the bill was automatically discarded. Since then, as government spending increased under an expansionary fiscal stance, criticism over this has also been a burden.

Experts emphasize that enforceable basic principles are necessary to maintain fiscal soundness. Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "Setting a ceiling on national finances might demonstrate globally the importance of fiscal soundness," adding, "It might improve the national credit rating, but since the economy is in a contraction, the macroeconomic risks could outweigh the benefits."

He continued, "If exceptions are allowed for increased government spending, there could be controversies over when such exceptions apply," and warned, "Obsessing over fiscal rule numbers could lead to unnecessary disputes and cause missed timing for policy implementation." Professor Kim So-young of Seoul National University’s Department of Economics also said, "It is right to spend money in the current wartime-like situation, but it must be done with principles and only where necessary," adding, "A concrete fiscal management plan should be established considering the prolonged economic downturn."

Meanwhile, advanced countries adopt fiscal rules that set ceilings. The EU recommends keeping the national debt ratio below 60% of GDP and the structural fiscal deficit below 3% of GDP. Germany’s constitution explicitly states that new debt must be within 0.35% of GDP.