Joseyeon "Fiscal Policy, Political Influence Too Strong... Institutional Reform Essential"

Korea Institute of Public Finance 'Fiscal Expenditure Policy for Growth' Report

[Sejong=Asia Economy Reporter Son Seon-hee] A suggestion has been made that institutional reform is essential due to the excessive political influence in deciding fiscal policies that control the nation's treasury. It is pointed out that the system should be organized so that fiscal policy can properly establish itself as a 'macroeconomic policy' tool, and through this, political decision-making should be gradually minimized.

Park No-uk, Senior Research Fellow at the Korea Institute of Public Finance, published a report titled 'Fiscal Expenditure Policy for Growth' on the 29th containing these contents.

The report cited 'low growth, low inflation, and low interest rates' as the background for the recent continuation of expansionary fiscal policy. Senior Research Fellow Park explained, "The continuation of the low growth trend raises the need for economic policies that promote growth, and the ongoing trends of low interest rates and low inflation suggest a reduction in monetary policy space along with an expansion of fiscal policy space."

In fact, in Korea as well, expansionary fiscal policies have been implemented recently due to the continued low interest rate environment, resulting in a sharp increase in national debt. Although experts have consistently pointed out the need for debt management, the government emphasized that 'expansionary fiscal policy' is a global trend and decided to maintain it next year as well.

However, the report pointed out, "Prudent fiscal management remains an important prerequisite," adding, "The increase in national debt size is not because national credit ratings or interest rates are unresponsive, but because other factors are overwhelming; therefore, the increase in national debt size should still be regarded as a risk management target." It also emphasized the importance of total debt management by stating, "Total fiscal discipline itself must function in fiscal management."

It further analyzed, "While monetary policy is carried out quite independently by the central bank, fiscal policy is essentially conducted through political decision-making processes," and "Although various reforms to enhance the rationality of fiscal policy have been made in Korea, political influence in the fiscal policy decision-making process is expanding with the advancement of democratization." In particular, it noted, "Fiscal policy involves income redistribution issues related to tax burdens and the beneficiaries of fiscal expenditures, so it becomes part of the political decision-making process," and "Institutional reform to improve the rationality of the decision-making process is essential for fiscal policy to establish itself as an important economic policy tool."

The report emphasized 'internalization of fiscal discipline' by citing the cases of the Netherlands and Sweden, which have excellent economic performance along with social safety nets. The necessary institutional improvement elements for this include ▲ independent fiscal institutions ▲ medium-term budgeting and operation (multi-year rather than annual) ▲ setting fiscal rules ▲ performance management of fiscal projects and restructuring of expenditure structure ▲ total fiscal management and decentralization of authority over specific projects.

Research Fellow Park added, "After such restructuring work, it is necessary to embed an automatic stabilization mechanism that minimizes political decision-making."