[Exclusive] Government May Drop 'Managed Fiscal Balance' from Fiscal Rules

Social Security Funds Nearing Deficit
Difficulties in Accurately Assessing Fiscal Health

The government is considering excluding the managed fiscal balance as a key indicator in the process of establishing new fiscal rules. This comes from the judgment that, as social security funds such as the National Pension Service are expected to soon turn to deficits, it has become increasingly difficult to accurately assess the fiscal status using the managed fiscal balance.

According to relevant ministries on August 20, the Ministry of Economy and Finance has begun procedures to establish new fiscal rules. The ministry is reviewing various scenarios, including shifting the focus of fiscal rules to the consolidated fiscal balance. A government official said, "Since this must be coordinated with the National Assembly, it is not something the ministry can decide on its own," but added, "We are considering whether it is necessary to continue using the managed fiscal balance as a key indicator."

The managed fiscal balance is a unique fiscal indicator used only in Korea. It is calculated by subtracting social security funds-such as the National Pension Service, Teachers’ Pension, Employment Insurance, and Industrial Accident Compensation Insurance funds (funds for which the state has a legal payment obligation)-from the consolidated fiscal balance (total revenue minus total expenditure). The Ministry of Planning and Budget first introduced it in 2004 under the name "substantive consolidated fiscal balance," and since 2013, it has been called the "managed fiscal balance." At the time, the surplus in the National Pension Fund was accumulating significantly, so the indicator was adopted to eliminate the illusion that the fiscal status was healthier than it actually was if only the consolidated fiscal balance was considered.

Social Security Funds Facing Imminent Deficits... Managed Fiscal Balance Now Causes Distortion

However, circumstances have changed. More than 20 years have passed, and social security funds are now facing imminent deficits. According to the National Pension Research Institute, the National Pension balance is expected to turn to a deficit starting in 2029. The National Assembly Budget Office predicts that the Teachers’ Pension will enter a deficit in 2028. The overall balance of social security funds is also deteriorating. Based on the 2024 settlement, the surplus was 61.2 trillion won, but it is expected to plummet to 18.2 trillion won (provisional) in 2025.

For this reason, the government is reviewing various fiscal indicators to be set in the fiscal rules for controlling public finances. The consolidated fiscal balance is the OECD’s international comparison standard, and most countries use it, but each country also utilizes various indicators tailored to its own circumstances. For example, Japan, which has a high level of national debt, uses the primary balance-excluding net interest payments-to assess only the current year’s fiscal situation.

There are internal opinions that, going forward, fiscal rules should be based on the consolidated fiscal balance, which serves as the international comparison standard, in order to properly manage public finances amid social security fund deficits. Some argue that the consolidated fiscal balance, which was used during the Moon Jae-in administration’s push for fiscal rules, should be adopted again. At that time, the continued surplus in social security funds meant that using the consolidated fiscal balance made fiscal discipline more relaxed. However, with the situation now reversed and social security funds facing deficits, internal discussions and coordination with the National Assembly are expected to be challenging. This is because adopting the consolidated fiscal balance while social security funds are in deficit could result in tighter fiscal constraints in the future.

Meanwhile, major countries have recently been easing their previously strict fiscal rules in response to the need for fiscal expansion. Among European Union (EU) member states, Germany, which has the strictest fiscal discipline, passed a bill in its parliament in March to partially revise the "debt brake" (Schuldenbremse), which sets the limit on government borrowing, to exempt defense spending. This allows the government to increase fiscal expenditures for defense, even if it means taking on more debt. Germany’s debt brake is a fiscal rule that limits the government’s annual new borrowing to within 0.35% of GDP. The EU has also decided to exclude defense spending from the application of its fiscal rules. The EU’s fiscal rules require member states to keep their fiscal deficits below 3% of GDP and national debt below 60%, imposing sanctions for exceeding these limits, but defense spending is now exempted.