"Maintain National Debt Ratio Below 45%" United Future Party Proposes Amendment to National Finance Act

[Asia Economy Reporter Kim Hyunjung] Amid the government's unprecedentedly large supplementary budget (supplementary budget) to respond to the novel coronavirus disease (COVID-19) crisis, a bill to amend the National Finance Act requiring the national debt ratio to be maintained below 45% has been proposed.

On the 7th, Rep. Choo Kyung-ho of the United Future Party announced that he had introduced the "National Finance Act Amendment Bill," which includes fiscal rules such as maintaining the national debt ratio below 45% and the managed fiscal balance deficit ratio below 3%, as the first bill of the 21st National Assembly. Rep. Choo is regarded as a leading traditional economic bureaucrat-turned-lawmaker, having served as Vice Chairman of the Financial Services Commission and First Vice Minister of Strategy and Finance.

Previously, the Ministry of Economy and Finance submitted a third supplementary budget proposal worth 35.3 trillion won to the National Assembly, and if the supplementary budget passes as originally proposed, the national debt ratio will increase by 7.7 percentage points in four years. This is the fastest increase since related statistics began in 1997. This is why there are calls for fiscal rules, the foundation for sustainable national finance management, to be legislated through the amendment.

The core of the National Finance Act amendment bill proposed by Rep. Choo is that the government must maintain the national debt ratio below 45% and the managed fiscal balance deficit ratio below 3%. In cases where the national debt ratio exceeds 45% due to war, disaster, or mass unemployment, the bill mandates that the world surplus (excess tax revenue + unspent expenditure) be prioritized for national debt repayment, and if not fully repaid, a plan to reduce national debt over five years must be established. Additionally, every two years, long-term financial projections for the eight major social insurances and long-term fiscal outlooks must be conducted, published, and used to review the appropriateness of the national debt ratio and submitted to the National Assembly.

Furthermore, the government is required to attach a public sector debt management plan to the national fiscal management plan submitted to the National Assembly and to enforce compliance with the statutory limit on the national tax reduction rate (calculated by dividing the amount of national tax reductions by the sum of total national tax revenue and national tax reductions), thereby strengthening government accountability in fiscal policy execution. The statutory limit on the national tax reduction rate is the average national tax reduction rate over the past three years plus 0.5 percentage points.

[Image source=Yonhap News]

According to an IMF survey from 1985 to 2015, a total of 85 countries?including 29 advanced countries such as the United Kingdom, Germany, and Sweden, 33 developing countries, and 23 low-income countries?have introduced fiscal rules to limit excessive government fiscal abuse. If this amendment passes, South Korea is also expected to introduce fiscal rules to control indiscriminate government spending.

In addition to national debt, South Korea has significant debts not reflected in national debt, such as household debt, corporate and public enterprise debt, and pension liabilities. According to the Bank for International Settlements (BIS), South Korea's total debt, combining government, household, and corporate sectors, reached 4540 trillion won as of the end of last year, equivalent to 237% of GDP. In this situation, if reckless fiscal expansion causes a rapid rise in the national debt ratio, it could trigger foreign investors to withdraw funds and sell government bonds, leading to a decline in the won's value and a stock market crash, which is extremely dangerous.

Rep. Choo said, "According to the third supplementary budget, the increase in South Korea's national debt this year will reach a record high of 100 trillion won," adding, "While expanding national finances is necessary to revive the struggling economy due to COVID-19, it is a serious problem that there are no standards to manage the rapidly increasing national debt." He further explained, "This opportunity urgently requires social consensus on long-term fiscal soundness, including fiscal rules."

This content was produced with the assistance of AI translation services.