[Initial Timing] Fiscal Rules

[Image source=Yonhap News]

[Sejong=Asia Economy Reporter Kim Hyunjung] The introduction of the ‘Korean-style fiscal rule’ that the government had been promoting seems to be off the table. Since the Ministry of Economy and Finance submitted the amendment bill to the National Finance Act to the National Assembly at the end of December 2020, it has been pending for over two years. Although the Ministry of Economy and Finance reportedly put considerable effort into creating the rule and explaining it to the National Assembly, it has become impossible to introduce it within the Moon Jae-in administration’s term.

With the presidential election approaching, the National Assembly’s interest is not ‘how to tighten’ but ‘how much to increase.’ During the unprecedentedly rapid ‘snowflake supplementary budget’ process, the ruling and opposition parties repeatedly competed to increase the amount, expanding it to 30 trillion won and then 50 trillion won. This amount far exceeds the government’s already announced 14 trillion won, more than triple the original figure.

The fiscal rule announced by the government is a kind of norm that sets limits so that fiscal indicators do not exceed certain levels. The formula looks simple but is quite difficult to understand: the value obtained by multiplying the ratio of national debt to 60% and the ratio of the integrated fiscal balance to -3% must be less than 1.0. The government’s plan was to apply this starting from the 2025 fiscal year, considering the severe COVID-19 situation at present.

Applying this formula, the calculated value after last year’s supplementary budget is 1.16. This year, based on the main budget, it comfortably falls within the standard line at 0.69, but if a supplementary budget exceeding 50 trillion won is pushed as the ruling and opposition parties claim, and if, as some presidential candidates have suggested, second and third supplementary budgets are prepared, it is certain that the rule will not be observed. It is unlikely that spending will suddenly be reduced toward the end of the next president’s term in 2025 or that extraordinary measures to improve fiscal soundness will be taken. Reluctance to introduce a rule that will not be kept is, in a way, a natural outcome.

Meanwhile, this year, the national debt per capita is expected to exceed 20 million won for the first time in history. Based on this year’s main budget, the national debt is 1,064.4 trillion won, and even under the conservative assumption that the first supplementary budget proceeds as the government proposed, more than 10 trillion won in deficit bonds will need to be issued, raising the national debt to at least 1,074.4 trillion won. Dividing this by last year’s resident registration population, the national debt per capita this year is 20.81 million won. Although the excess tax revenue from last year, expected to approach 30 trillion won, should be immediately used to repay national debt according to the National Finance Act, it is uncertain how it will flow according to the new government’s plans after April.

Currently, expanded fiscal spending is inevitable due to the COVID-19 situation, but fiscal soundness is the foundation of macroeconomic stability. A small open economy like Korea cannot and should not follow the fiscal policies of the U.S. and Europe. Moreover, Korea will become the most aged country in the world in the near future. According to OECD analysis, Korea’s proportion of the population aged 65 and over is 17.3% this year, lower than the G5 countries, but by 2045, it is expected to surpass Japan (36.8%), the current world leader, reaching 37.0%. In addition to geopolitical risks, fiscal soundness greatly affects the country’s credit rating.

Even if it places some burden on future generations, alleviating the polarization and inequality accelerated by COVID-19 in the current generation is important. If the supplementary budget fulfills that role properly, whether it is 50 trillion won or 100 trillion won, resources must be secured even if it is excessive, and no citizen would complain about a debt of several tens of millions of won per capita. However, large sums of money released before elections are generally not used precisely. This has been true so far and is unlikely to change in the future. Mentions and emphasis on fiscal soundness are not the nonsense of bureaucrats trapped in dogma but practical lessons related to wasted money and populism.