[New Government Fiscal Management] From Moon Administration's 'Expansion' to Yoon Administration's 'Soundness'... Tightening the Fiscal Reins

[Asia Economy Sejong=Reporter Kim Hyewon] The Yoon Seok-yeol administration aims to improve the managed fiscal balance deficit, which is at about -5% of GDP this year, to within -3%, the level before COVID-19. By 2027, the government plans to manage the national debt ratio to the mid-50% range relative to GDP. Legislation on fiscal rules using the managed fiscal balance, rather than the integrated fiscal balance, will also be pursued.

On the 7th, the government held the first National Fiscal Strategy Meeting chaired by President Yoon Seok-yeol, attended by Cabinet members, key ruling party figures, and private experts, to discuss the national fiscal management strategy for the next five years of the new administration.

This National Fiscal Strategy Meeting differentiated itself from previous ones by moving away from a Cabinet-centered approach. It included presentations and discussions by numerous private experts such as businesspeople and researchers, including Ko Oh-hyun, an advisor at Samsung Electronics, to convey voices from the field. The venue was also selected as a regional national university.

Chu Kyung-ho, Deputy Prime Minister and Minister of Economy and Finance, who presented the new government's fiscal strategy, set the major goal of fiscal management direction as "supporting the private sector-led resurgence of the Korean economy and enhancing fiscal sustainability." To this end, he proposed four key policy directions: rapid support for funding the fiscal demands of national tasks (209 trillion won), shifting the fiscal stance from expansionary to sound, fiscal innovation including legislation of fiscal rules, and establishing and promoting the Fiscal Vision 2050.

First, to secure momentum for implementing national tasks, the fiscal demands of these tasks will be reflected in next year's budget and the 2022-2026 medium-term investment plan (to be submitted to the National Assembly in early September). Funding will be secured through strong expenditure restructuring and revenue expansion.

To stabilize the rapid increase in national debt, which has risen to about 1,100 trillion won this year, the fiscal balance will be improved to the pre-COVID-19 level of -2.8% (managed fiscal balance) in 2019, and the national debt ratio will be managed within the mid-50% range of GDP during the Yoon administration's term. The average increase in national debt ratio under previous administrations was 5-6 percentage points. Notably, during the past five years of the Moon Jae-in administration, the national debt ratio increased by 14.1 percentage points. The Yoon administration expressed its intention to manage the national debt increase at about one-third of that rate. The national debt ratio based on the first supplementary budget this year is 50.1%.

Choi Sang-dae, Second Vice Minister of Economy and Finance, explained in a pre-briefing, "The average annual total expenditure growth rate over the past five years was 9.0%, but according to future fiscal management standards, the total expenditure growth rate will significantly decrease to a level similar to previous years." He added, "From next year, we will operate in that manner, and considering this, the fiscal stance will shift from expansionary to tight or sound."

The previous government proposal presented by the Moon administration in 2020 during the legislative process of fiscal rules was effectively discarded. The new government will pursue legislation of fiscal rules that are simpler yet legally binding and stricter. Instead of using the integrated fiscal balance included in the previous government proposal, the managed fiscal balance, which is commonly used as a fiscal soundness management indicator, will be utilized. The managed fiscal balance is the integrated fiscal balance minus social security funds, reflecting the actual fiscal condition.

The new government's fiscal rule will be centered on "managed fiscal balance at -3% or less (with expenditure limits reduced if debt exceeds 60%)" and will specify the rule limits in law to ensure a high level of binding force. The managed fiscal balance will be managed at "less than -3% of GDP," and if the national debt exceeds 60%, the expenditure limit will be further reduced. The complex multiplication formula from the previous government proposal, which multiplied the ratio of national debt to 60% by the ratio of integrated fiscal balance to -3% to determine compliance, has been withdrawn. The timing has also changed from "deferred until 2025" in the previous proposal to "applied immediately after legal amendment." The government plans to prepare detailed fiscal rule proposals through public hearings and announce them in early September. The managed fiscal balance based on the first supplementary budget this year is -5.2%. Additionally, the government plans to establish the Fiscal Vision 2050 by the end of this year to identify and promote reform tasks in the medium to long term.

Vice Minister Choi said, "The biggest difference from the previous fiscal rules is that the standard has changed from the integrated fiscal balance to the managed fiscal balance, and the multiplication formula between national debt and integrated fiscal balance has been replaced with a method used by most advanced countries." He added, "However, not only the balance standard but also if the debt exceeds a certain level (60%), the expenditure limit will be further reduced."

The government will begin work to reform the Education Grant, currently used only for kindergartens and elementary to high schools, to also support universities. To this end, a provisional "Higher and Lifelong Education Support Special Account" will be established using education taxes from the education grant. The government plans to enact the Higher and Lifelong Education Special Account Act and amend the National Finance Act and the Local Education Finance Grant Act.

The Education Grant is education finance distributed by the central government to local education offices nationwide to support kindergartens and elementary to high schools. It is funded by 20.79% of total domestic taxes and part of the education tax. Over the past 20 years, the Education Grant has increased about fourfold, while the school-age population has continuously declined due to population decrease, leading to ongoing criticism that the Education Grant is not efficiently allocated. As of this year, the Education Grant amounts to about 65.1 trillion won, compared to 14.9 trillion won in 2000. Meanwhile, the school-age population aged 6-17 decreased from 8.11 million in 2000 to 5.39 million this year.

The government will also implement the strongest expenditure restructuring at a historic level. Similar or overlapping private subsidy projects will be reexamined from scratch and either removed or reduced in next year's budget. As of May this year, 1,205 private subsidy projects were reviewed, with 61 to be abolished and 191 to be reduced. Furthermore, when preparing next year's budget, the government plans to strictly manage civil servant headcount and salaries, considering difficulties in the livelihood economy, raising possibilities such as headcount reduction or salary freezes.

President Yoon Seok-yeol pointed out the need to secure funds through the sale of unnecessary public institution assets and to invest these funds in supporting vulnerable groups. The government plans to increase incentives for private investment projects, expanding the investment scale from an average of 5 trillion won per year to 7 trillion won plus alpha. It will also promote housing supply and startup facility support using state-owned properties.