Passage of Korean-Style Fiscal Rules with Tricks in the National Assembly Also Unlikely

No Compulsion and Numerous Exceptions
Strong Criticism of Rubber Band Application
Ruling Party Still Questions the Introduction Itself

[Image source=Yonhap News]

[Asia Economy Reporters Joo Sang-don and Jang Se-hee] The government’s announcement on the 5th of the 'Korean-style Fiscal Rules,' which was postponed twice due to opposition from the ruling party, has sparked fierce criticism. This is because the fiscal rules themselves lack enforceability and contain numerous exceptions that allow non-compliance. Additionally, the national debt ratio limit of 60% of Gross Domestic Product (GDP) is considered excessively lax, rendering the standard ineffective. Apart from criticisms of the detailed contents of the fiscal rules, the ruling party still questions the introduction of the fiscal rules themselves, raising concerns that the Korean-style fiscal rules might follow the same path as the 'Fiscal Soundness Act,' which was automatically discarded during the 20th National Assembly.

The main point of the fiscal rules announced by the Ministry of Economy and Finance on this day is to manage the national debt ratio at 60% and the integrated fiscal balance within -3% starting from the 2025 fiscal year. However, even if the debt ratio or balance exceeds the standard, compliance can be achieved if other indicators fall below the standard. For example, if the debt ratio exceeds the standard at 65%, but the integrated fiscal balance is -2.77%, it is considered to meet the standard.

The government also included several supplementary measures with the intention of "supporting the necessary fiscal role in response to economic crises and economic slowdowns." A representative example is the exemption from applying the rules in the event of national disasters such as the novel coronavirus disease (COVID-19) or severe economic crises. In cases where there is a need to respond to economic slowdowns, the integrated fiscal balance standard will be relaxed by 1 percentage point from -3% to -4%. However, clear criteria for national disasters, severe economic crises, or economic slowdowns have not yet been presented. This is why there is criticism that the rules can be applied flexibly like a "rubber band."

Professor Kim Woo-cheol of the Department of Taxation at the University of Seoul pointed out, "The significance of fiscal rules lies in their strictness," adding, "The formula that multiplies the national debt ratio standard and the integrated fiscal balance deficit standard and requires the product not to exceed 1 complicates the operation itself and seems to avoid judgment." Professor Kim So-young of Seoul National University’s Department of Economics also criticized, saying, "The national debt ratio will rise to 58.6% in 2024," and "The 60% standard means they will just spend money up to 60%."

In the National Assembly, voices opposing the government’s Korean-style fiscal rules are emerging from both ruling and opposition parties. Song Eon-seok, a member of the People Power Party, argued, "A national debt ratio of 60% is irresponsible. It should be set at 45%, legally established, and applied from next year." In response, the Ministry of Economy and Finance stated that debt and balance rules are the most commonly used types of fiscal rules, and considering the medium-term plan outlook, achieving a national debt of 60% and an integrated fiscal balance ratio of -3% is by no means lax.

Within the ruling party, there are also opposing opinions regarding the introduction of fiscal rules themselves. Song Young-gil, a member of the Democratic Party of Korea, questioned, "Is it really effective?" and pointed out, "If the fiscal role is blocked by fiscal rules, restoring it may incur even greater costs and cause problems such as tax revenue shortfalls." Park Hong-geun, also from the same party, emphasized, "While I agree on the necessity of fiscal rules, rather than discussing it immediately, we should have the discussion once the COVID-19 situation is over."

The government plans to submit a bill to amend the National Finance Act, which includes the basis for the fiscal rules, to the National Assembly by November. The government explained, "Overall coordination with the ruling party has been achieved, but some members have differing opinions," and stated that if the bill does not pass through the National Assembly, it will voluntarily comply with the rules.

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