Hankyung Research Institute: "South Korea's Fiscal Soundness Index 'Backslides'... Ranked 26th Among 32 Countries"

"Maintain Soundness Through Targeted Fiscal Spending"

[Asia Economy Reporter Dongwoo Lee] It has been revealed that the decline in South Korea's ranking in fiscal soundness indicators among the Organisation for Economic Co-operation and Development (OECD) countries is steep. There are calls to prevent the deterioration of fiscal soundness through targeted fiscal measures.

The Korea Economic Research Institute announced on the 23rd that, based on a comparative analysis of fiscal soundness indicators of 32 OECD countries, South Korea's Fiscal Soundness Index (IFS) dropped 12 ranks from 14th in 2010 to 26th in 2019, with the index value rising from 0.98 to 1.04 over the past decade.

The IFS is an index developed in 2003 by the International Monetary Fund (IMF) to assess the feasibility of achieving set targets for national debt ratios. This index is based on statistics such as current growth rate, government bond interest rates, primary fiscal balance ratio, and national debt ratio, with lower values indicating better fiscal soundness.

The Korea Economic Research Institute explained that South Korea's IFS worsening from below 1 to above 1 signals a warning for the country's medium- to long-term fiscal soundness. Among the 32 OECD countries, South Korea's overall ranking in the 'National Debt Soundness Indicator' fell 7 places from 5th in 2010 to 12th in 2019.

The overall ranking was calculated by summing the ranks of three indicators?▲cyclically adjusted primary fiscal balance ratio, ▲net debt ratio, and ▲growth rate-interest rate gap?and ordering them in ascending order.

South Korea's cyclically adjusted primary fiscal balance ratio rose from 0.7% in 2010 to 0.8% in 2019, but its ranking among the 32 OECD countries dropped from 4th to 10th. The net debt ratio ranking improved from 12th to 6th during the same period. The growth rate-interest rate gap sharply declined from 5.0% to -0.6% as the growth rate fell much faster than the interest rate, causing the ranking to plummet from 4th to 28th.

The Korea Economic Research Institute emphasized that even though fiscal policy may seek a short-term role in economic stimulus amid the COVID-19 pandemic this year, medium- to long-term fiscal restraint measures are necessary to maintain fiscal soundness and debt sustainability.

The institute argued that, to preserve fiscal soundness, selective targeted welfare should be promoted rather than universal helicopter-drop style welfare, and that the 'pay-go rule'?which mandates securing funding when introducing new welfare programs?should be established. It also suggested adjusting spending priorities and thoroughly reorganizing unnecessary expenditures.

These measures are not optional but essential, considering the medium- to long-term increase in welfare demand due to rapid low birthrates and aging, as well as the enormous future costs of reunification, according to the Korea Economic Research Institute.

Choo Kwang-ho, Director of Economic Policy at the Korea Economic Research Institute, stated, “In order for our fiscal system to adequately handle the continuously increasing welfare demand and massive reunification costs amid rapid aging society, targeted fiscal measures rather than indiscriminate spending are required, even if active fiscal policy is necessary. We must establish and adhere to sound fiscal rules such as balancing expenditures within revenues in the medium to long term.”

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