[New Government Fiscal Management] Managing Fiscal Deficit Within 3% of GDP... Targeting National Debt in Mid-50% Range by 2027

Government Holds '2022 National Fiscal Strategy Meeting'
Shift from 'Expansionary Fiscal Policy to Sound Fiscal Policy'... Establishment of 'Fiscal Vision 2050 (Tentative)' by Year-End

[Image source=Yonhap News]

[Asia Economy Sejong=Reporter Kwon Haeyoung] The government has set a goal to manage the fiscal deficit ratio relative to Gross Domestic Product (GDP) within -3% and to keep the national debt ratio in the mid-50% range by 2027. This marks a shift from the previous administration's government-led growth and 'expansionary fiscal' policy during the COVID-19 pandemic to a 'sound fiscal' policy aimed at normalizing the rapidly deteriorating national finances.

On the 7th, the government held the '2022 National Fiscal Strategy Meeting' attended by Cabinet members, key ruling party figures, and private experts to discuss these matters.

First, the government plans to manage the managed fiscal balance deficit within -3% of GDP, down from the current -5%. The managed fiscal balance is an indicator that shows the actual state of national finances by excluding social security fund balances from the integrated fiscal balance (total government revenue minus total expenditure). The government decided to use the stricter managed fiscal balance as the standard instead of the integrated fiscal balance, which had been mainly used until now. The fiscal deficit based on the managed fiscal balance was -2.8% of GDP in 2019, but worsened to -5.8% in 2020, -4.4% in 2021, and -5.2% based on the first supplementary budget in 2022 due to increased fiscal spending to respond to COVID-19. The government’s policy is to significantly improve this to within -3%, considering the fiscal soundness management standards of major advanced countries.

Choi Sang-dae, Vice Minister of Strategy and Finance, explained, "The average annual growth rate of total expenditure over the past five years was 9.0%, but according to future fiscal management standards, the growth rate of total expenditure will be significantly reduced to a normal level. From next year, we will operate in this manner, transitioning from an expansionary fiscal stance to a tightening or sound fiscal stance."

The national debt ratio will also be managed to not exceed the mid-50% range by 2027, up from the current 50.1%. According to the '2021-2025 National Fiscal Management Plan' submitted to the National Assembly by the previous government, the national debt ratio was projected to be 58.8% in 2025. The government aims to lower this to the mid-50% range by 2027 through fiscal soundness strengthening measures such as expenditure efficiency improvements.

The government’s push to stabilize the growth rate of national debt is due to the rapid increase in national debt caused by worsening fiscal deficits over the past five years. The national debt ratio relative to GDP expanded from 36.0% in 2017 to 50.1% based on the first supplementary budget in 2022. The national debt ratio increased by 14.1 percentage points over the past five years, and the government plans to limit the increase over the next five years to 5-6 percentage points, about one-third of the previous administration’s increase. The average increase in national debt ratio under past administrations was also around 5-6 percentage points.

According to the International Monetary Fund (IMF), South Korea’s national debt increase rate relative to GDP from 2021 to 2026 is expected to be 5.4%, ranking first among OECD member countries. Considering that the average national debt increase rate of the Group of Seven (G7) countries?such as the United States (0%), the United Kingdom (0.6%), and Japan (-0.4%)?is -1.2%, South Korea’s rapid increase in national debt requires urgent management.

Additionally, the government plans to establish a 'Fiscal Vision 2050 (tentative)' by the end of the year to ensure sustainable finances. This will focus on identifying key tasks to be pursued within the next decade to address structural issues such as achieving carbon neutrality, entering the world’s oldest society, and the high national debt ratio relative to GDP, and to maintain fiscal sustainability. In particular, the government will prepare reform tasks jointly with 50 to 60 private experts through a public-private partnership and will formulate the plan after public hearings.

Vice Minister Choi emphasized, "When consulting with international credit rating agencies, fiscal soundness is no longer our strength, and efforts to strengthen fiscal soundness may affect South Korea’s sovereign credit rating in the future. We will establish a sound fiscal stance and promote fundamental institutional reforms such as legislating fiscal rules and bold fiscal innovation including expenditure efficiency improvements."