Government: "National Debt Ratio Limit 60%... However, Exemption Applies in Severe Economic Crisis"

MoEF, Announces Plan to Introduce 'Korean-style Fiscal Rules'

From Fiscal Year 2025, National Debt Ratio 60% and Integrated Fiscal Balance -3% Applied
Mandatory Establishment of Fiscal Soundness Measures if Limits Exceeded
Integrated Fiscal Balance Relaxed by 1 Percentage Point When Economic Response Needed
National Finance Act Amendment Bill to be Submitted to the National Assembly After Public Consultation

Hong Nam-ki, Deputy Prime Minister of Economy. (File photo)

[Sejong=Asia Economy Reporter Joo Sang-don] The government has decided to introduce a 'Korean-style fiscal rule' to maintain the sustainability of national finances. The standard will be set at a national debt ratio of 60% and an integrated fiscal balance of -3%, but exemptions from the rule will be allowed in cases of severe economic crises such as the COVID-19 pandemic.

On the 5th, the Ministry of Economy and Finance announced that it has prepared a plan to introduce such fiscal rules to respond to changes in the fiscal environment and maintain fiscal sustainability.

An official from the Ministry of Economy and Finance explained, "During the COVID-19 response, the national debt and fiscal deficit increased significantly, and due to a weakened revenue base and population decline, medium- to long-term fiscal conditions are expected to be challenging. This reflects the demand to introduce fiscal rules, which are operated by 92 countries worldwide, to ensure effective fiscal soundness management."

The Korean-style fiscal rule was designed based on three core elements: ▲binding nature ▲complementarity ▲effectiveness.

First, the standards were set at a national debt ratio of 60% and an integrated fiscal balance of -3%. However, even if one indicator exceeds the standard, compliance is possible if the other indicator is below the standard. The plan also includes a mandatory requirement to establish fiscal soundness measures to return within limits if the limits are exceeded.

Exceptions have also been prepared to support the necessary fiscal role in response to economic crises or economic slowdowns, such as the current COVID-19 crisis. In cases of severe economic crises, exemptions from the rule can be granted, and the increase in the debt ratio due to this will be initially deducted once and then gradually added over three years when calculating the limit. Additionally, if it is not a situation warranting exemption from the fiscal rule but there is a need to respond to economic slowdown, the integrated fiscal balance standard can be relaxed by 1 percentage point.

The government plans to ensure effective operation so that the purpose of introducing the fiscal rule can be fully realized. Considering that the COVID-19 situation is still ongoing, the rule will be applied from the fiscal year 2025, and the limits will be reviewed every five years in consideration of changes in the fiscal environment. Furthermore, institutional measures necessary for fiscal soundness management will be strengthened, such as requiring the government to attach specific funding plans when submitting fiscal-related bills.

The government plans to finalize the amendment bill to the National Finance Act, which includes the introduction of the fiscal rule, and submit it to the National Assembly after legislative procedures such as public notice.

Meanwhile, due to increased fiscal spending for COVID-19 response this year, the national debt ratio is expected to rise from 37.7% in 2019 to 39.8% based on the 2020 main budget, and up to 43.9% by the end of this year when reflecting the supplementary budget.

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