Criticism of "Too Lenient K-Fiscal Rules"... Hong Nam-ki Says "Achievement Is Not Easy" (Comprehensive)

Ministry of Economy and Finance 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 Are Exceeded
Integrated Fiscal Balance Relaxed by 1% Point When Economic Response Is Needed
"Subject Responsible for Exception Judgments and Specific Criteria to Be Established Later"

Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, is delivering opening remarks at the briefing on the introduction plan of the Korean-style fiscal rules held at the Government Complex Sejong on the 5th.

[Sejong=Asia Economy Reporters Joo Sang-don and Jang Se-hee] The government announced on the 5th the "Korean-style Fiscal Rule," centered on a "national debt ratio of 60% and an integrated fiscal balance of -3%." In response to criticism that the standards are "too loose," Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated that "these are not easy conditions to achieve."

On the afternoon of the same day, the Ministry of Economy and Finance announced that it had prepared a plan to introduce such fiscal rules. This Korean-style fiscal rule will be applied from the fiscal year 2025, considering that the COVID-19 situation is still ongoing.

First, the government set the national debt ratio at 60% and the integrated fiscal balance at -3% as the standards. However, even if one indicator exceeds the standard, it is possible to meet the criteria if the other indicator is below the standard. For example, if the national debt ratio exceeds 60%, the integrated fiscal balance standard can be lowered. The plan also includes a measure to make it mandatory to establish fiscal soundness measures to return within limits if the limits are exceeded.

Deputy Prime Minister Hong stated that this fiscal rule is a "challenging goal." Due to increased fiscal spending in response to COVID-19 this year, the national debt ratio rose from 37.7% in 2019 to 39.8% based on the 2020 main budget, and is expected to reach 43.9% by the end of this year after reflecting the supplementary budget. The national debt ratio is projected to be 58.6% in 2024, with a management fiscal balance of -5.6% (integrated -3.9%). Hong said, "(The increase in debt ratio and deterioration of fiscal balance) would be fortunate if it were limited to just this year, but the impact on national debt and balance will gradually affect over several years," adding, "As simulations show, I judge that this is by no means a loose standard."

Regarding setting the application timing of the fiscal rule to 2025, he explained, "Many countries have introduced fiscal rules during crises with a grace period of about five years," and added, "I think various supplementary measures to strengthen fiscal soundness will be implemented during that period in preparation for the application from the fiscal year 2025."

The government also included exception provisions 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, exemption from the application of the rule is possible, and the increase in debt ratio due to this will be deducted once in the limit calculation and then gradually added over three years. Additionally, if it is necessary to respond to economic slowdowns but not to the extent of exemption, the integrated fiscal balance standard can be relaxed by 1 percentage point.

However, specific criteria for exceptions were not presented. The government intends to decide on detailed criteria and the responsible party for exception judgments through future discussions, but this leaves open the possibility that the fiscal rule may not be followed based on the government's discretionary judgment. An Il-hwan Ahn, 2nd Vice Minister of the Ministry of Economy and Finance, said, "There are some criteria to a certain extent, but it is difficult to disclose them as quantitative numbers in advance," and added, "Regarding national disasters and economic crises, for example, major crises such as the global financial crisis, the International Monetary Fund (IMF) crisis, and the current COVID-19 crisis, we will specify more details through expert consultations and so on."

The government plans to finalize the amendment to the National Finance Act, which includes the introduction of fiscal rules, after going through legislative procedures such as public notice, and submit it to the National Assembly. Deputy Prime Minister Hong said, "Although some individual lawmakers have different opinions on the government's fiscal rules, overall coordination has been made with the ruling party," and added, "The government will submit the bill by the end of the year and negotiate with the National Assembly, closely consulting not only with the ruling party but also with the opposition."

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