"Fiscal Rules Should Be Discussed After Economic Stabilization... Currently at a Manageable Level"

Monthly Fiscal Forum December Issue Published by Korea Institute of Public Finance
Professor Ryu Deokhyun of Chung-Ang University Claims "Rule Adoption During COVID-19 Delays Economic Recovery"

[Sejong=Asia Economy Reporter Kim Hyun-jung] There has been a claim that the introduction of fiscal rules to strengthen the management of national fiscal soundness should be discussed after the economy stabilizes. Since South Korea's current national debt burden capacity is at a manageable level, it is explained that the timing of introducing rules that restrict active management should be coordinated.

Professor Ryu Deok-hyun of Chung-Ang University stated in the December issue of the Monthly Fiscal Forum published by the Korea Institute of Public Finance on the 23rd, "South Korea's national debt burden capacity is at a manageable level." Professor Ryu analyzed, "Last year, South Korea's national debt ratio was 37.2%, but the national debt ratio converted into government bonds for repaying general account deficits, which can be considered pure debt, was 21.2%."

According to Professor Ryu, the components of national debt include deficit-type debt to cover general account deficits and financial-type debt that can be repaid independently without separate resource mobilization for debt repayment. Last year, the ratio of deficit-type debt to financial-type debt was 57 to 43. He emphasized, "The sustainability of debt is ultimately established when interest repayment through revenue occurs and the national debt ratio relative to gross domestic product (GDP) can be maintained at a certain level," adding, "There is a need to discuss the absolute scale of national debt more precisely and meticulously."

He also diagnosed that the maturity of national debt and interest costs are in good condition. Professor Ryu said, "The average maturity of South Korean government bonds increased from 7.2 years in 2015 to 9.7 years in 2019, which is due to the trend of increasing the proportion of long-term bonds over the past decade." In fact, last year, the proportion of government bonds with a remaining maturity of less than one year was 7.3%, and those with 1 to less than 3 years was 19.4%. On the other hand, bonds with 5 to 10 years maturity accounted for 23.5%, and those over 10 years accounted for 30.8%.

He continued, "Due to recent low interest rates, the interest costs of national debt are also stabilizing," and predicted, "Even if national debt increases significantly, the interest burden on government bonds is unlikely to be a major problem at least within a medium-term horizon of about five years."

He argued that discussions on the introduction and soundness of fiscal rules should be pursued after economic stabilization and recovery of growth. Professor Ryu said, "In situations where expansionary fiscal policy involving large-scale fiscal deficits is adopted due to economic shocks such as the COVID-19 pandemic, fiscal rules may delay the full recovery of the economy," and mentioned, "In several countries, side effects such as evading fiscal rules through methods like creative accounting have occurred." He also diagnosed, "Introducing fiscal rules that set numerical debt ceilings and fiscal deficit limits in South Korea at present lacks effectiveness and validity." He advised, "Rather than numerical fiscal rules, it would be appropriate to introduce effective measures that can mitigate the pace of debt increase in the short term through various fiscal systems currently existing under the National Finance Act and operate them as 'implicit fiscal rules.'"

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