Today's Fiscal Rule Announcement... Will It Put a Brake on the Snowballing National Debt?

Likely Included in Specific Indicator Enforcement Decree... Exceptions Applied During Social, Natural Disasters and Economic Downturn Concerns

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] As the government announced the 'Plan to Introduce Korean-style Fiscal Rules' on the afternoon of the 5th, controversy over the effectiveness of the fiscal rules is also growing.

According to the Ministry of Economy and Finance on the 5th, the government is considering revising the National Finance Act to establish the legal basis for fiscal rules and including specific indicators such as the national debt ratio in the enforcement decree. Since the enforcement decree can be amended without going through the National Assembly, there is criticism that the standards could be loosened. In addition, flexibility is expected to be emphasized by allowing exceptions in cases of social or natural disasters or concerns about economic downturns. Therefore, the fiscal rules are unlikely to avoid controversy over their flexibility even after the announcement.

Fiscal rules are norms that prevent fiscal indicators such as national debt from exceeding certain levels. The International Monetary Fund (IMF) identifies three components of fiscal rules: ▲ legal foundations such as constitutions, laws, and international agreements ▲ aggregate fiscal targets such as fiscal balance, national debt, and total expenditure ▲ judicial, financial, or credit sanctions if fiscal rules are not complied with.

Germany stipulates in its constitution that new debt issuance must be below 0.35% of Gross Domestic Product (GDP). The United States introduced the Pay-As-You-Go (PAYGO) principle through the Budget Enforcement Act of 1990. PAYGO requires that any new legislation causing mandatory spending increases or revenue decreases must be accompanied by corresponding funding measures.

Why are fiscal rules necessary? Due to government spending increases from four supplementary budgets, the national debt has reached an all-time high. Based on the 4th supplementary budget, this year's national debt is 846.9 trillion won, with a debt-to-GDP ratio of 43.9%. The managed fiscal balance deficit also expands to 118.6 trillion won, with a deficit ratio exceeding 6%.

Fiscal rules are expected to be legislated at the earliest by November. After the announcement of the fiscal rules introduction plan (40 days of legislative notice) → consultation with related ministries → Cabinet approval → National Assembly passage, the rules can be implemented. Therefore, the related law is expected to be submitted to the National Assembly at the earliest in November, or possibly next year at the latest.

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