[2020 National Audit] The Hidden Meaning Behind Governor Lee Ju-yeol's Remarks: "Need for Changes in Fiscal Rules Proposal"

Emphasizing the need for flexibility during COVID-19 but simplicity and enforceability after the crisis

Current fiscal rule formulas are overly complex,
indicating the need for simple policies and aggregate limits post-crisis

Ijuyeol, Governor of the Bank of Korea [Photo by Yonhap News]

[Asia Economy Reporter Kim Eun-byeol] Lee Ju-yeol, Governor of the Bank of Korea, has repeatedly expressed his stance on fiscal rules, drawing attention to the underlying implications. Although the Bank of Korea mentioned the conditions of fiscal rules at a theoretical level, a closer look at the elements emphasized by Governor Lee suggests that changes to the current fiscal rule proposal may be necessary.

On the 23rd, the Bank of Korea stated in a written response to a query from Jeong Il-young, a member of the National Assembly's Planning and Finance Committee from the Democratic Party of Korea, that "Governor Lee’s remarks expressed a fundamental position on fiscal rules, highlighting the importance of balancing strictness as a rule with flexibility for crisis response." Earlier, at a monetary policy direction meeting, Governor Lee said, "The International Monetary Fund (IMF) also presents simplicity, enforceability, and flexibility as key elements when setting fiscal rules."

Basically, these remarks indicate agreement on the necessity of fiscal rules themselves but emphasize the need for flexibility in the current situation amid the COVID-19 pandemic. However, it can be interpreted that he indirectly pointed out that the fiscal rule formula proposed by the government is too complex. The Korean-style fiscal rule formula proposed by the government is '[(National Debt Ratio/60%) × (Consolidated Fiscal Balance Ratio / -3%)] ≤ 1.0'. In this case, if the consolidated fiscal balance ratio is reduced to about -2%, the national debt ratio can increase up to 90%. In an extreme case, if the consolidated fiscal balance ratio is reduced to -1%, the national debt ratio can increase up to 180% while still complying with the fiscal rule. Other countries that have introduced fiscal rules use a simpler method by selecting one of expenditure, balance, or debt rules to regulate the total amount 'simply' instead of using a complex formula.

The Bank of Korea also clarified that Governor Lee’s remarks on fiscal rules are within his authority. According to Article 4 (Coordination with Government Policies, etc.) and Article 15 (Governor’s Authority and Duties) of the Bank of Korea Act, this is fully possible. Governors of central banks in countries such as the United States and Germany have also continued to express their views on fiscal matters. Meanwhile, the government is unlikely to change its stance on fiscal rules. Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, reiterated the necessity of introducing fiscal rules during the parliamentary audit the day before, stating that failure to legislate fiscal rules could affect the country’s credit rating.

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