[Exclusive] Finance Ministry Drops 'Fiscal Rule' for Managing National Debt Growth

Phrase on Promoting Fiscal Rule Legislation Removed
from National Fiscal Management Plan

The Ministry of Economy and Finance has effectively scrapped its push to legislate a fiscal rule that would limit the annual national budget deficit to within 3% of gross domestic product (GDP) in order to maintain fiscal soundness.

According to relevant ministries on the 26th, the Ministry of Economy and Finance deleted the phrase "continued promotion of fiscal rule legislation" from the "Fiscal Aggregate Effects and Management Plan of the National Fiscal Management Plan" submitted to the National Assembly on the 23rd along with the second supplementary budget proposal. As recently as the first supplementary budget in April, before the change of administration, the fiscal management plan submitted to the National Assembly by the ministry included a statement that it would "continue to promote the legislation of fiscal rules, which are the basic principle of fiscal management, to ensure fiscal sustainability."

A fiscal rule refers to a legal mechanism that mandates certain limits on fiscal balances or national debt to ensure the sustainability of public finances. Under the Yoon Suk-yeol administration's commitment to sound fiscal management, the Ministry of Economy and Finance had been pursuing legislation to make it mandatory by law to keep the annual managed fiscal deficit below 3% of GDP.

If the new supplementary budget proposal of 30.5 trillion won submitted by the new administration passes the National Assembly, the ratio of the managed fiscal deficit to GDP will expand from 2.8% to 4.2%, surpassing the 3% ceiling set by the fiscal rule. Since 2020, when fiscal spending was significantly increased to respond to the pandemic, the fiscal rule has not been observed even once in the past five years.

In the face of a weakened revenue base, adhering to the fiscal rule would require reducing total expenditures. However, due to the structural increase in fiscal demand caused by low birth rates and an aging population, and the expansionary fiscal policy declared by the Lee Jaemyung administration to revive sluggish domestic demand, the trend of increasing total expenditures appears inevitable. This year, for the first time, the government's annual total expenditure will exceed 700 trillion won, reaching 702 trillion won. The total expenditure growth rate will be sharply increased from 2.5% in the main budget to 6.9%.

In response to criticism that the fiscal rule will not be observed, Lim Kigeun, the Second Vice Minister of Economy and Finance, stated, "Rigidly adhering to the fiscal rule could actually have negative effects on the economy and fiscal management," adding, "Even the previous administration failed to observe the 3% rule for various reasons. It will be necessary to re-evaluate the feasibility and acceptability of the fiscal rule."

At the first National Fiscal Strategy Meeting, scheduled to be presided over by President Lee Jaemyung around July 20, these issues, including the current administration's fiscal management goals and strategies for securing the long-term sustainability of public finances, are expected to be discussed extensively.

According to the fiscal aggregate management plan submitted by the Ministry of Economy and Finance, national debt, which stood at 1,273.3 trillion won in the main budget, will increase to 1,300.6 trillion won for the first time this year. The debt is projected to rise to 1,388.4 trillion won in 2026, 1,478.4 trillion won in 2027, and 1,570.1 trillion won in 2028. The national debt-to-GDP ratio will exceed 50% for the first time next year (50.3%).

The Ministry of Economy and Finance stated, "We are seeking various ways to secure the long-term sustainability of public finances under the expansionary fiscal stance," and added, "We will strengthen efforts to expand the revenue base through expenditure restructuring for annually underperforming or low-performing projects, streamlining mandatory expenditures, revising tax exemptions and reductions, rationalizing the tax system, and taxing undeclared income."