Government Allows 'Self-Exemption' from Fiscal Rules... Concerns Over Effectiveness Even If Legislated

Vague Exceptions to Fiscal Rules, Government's Decision on Application Exemption
Concerns Already Arise Over Frequent Supplementary Budgets 'Nine Years in Ten'
"Need to Quantify Economic Crisis Criteria or Establish Independent Fiscal Commission"

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is delivering opening remarks at the Emergency Economic Ministers' Meeting held at the Government Seoul Office in Jongno-gu, Seoul on the 13th. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Sejong=Reporter Kwon Haeyoung] Although the government has introduced a new fiscal rule that strongly controls the national budget, controversy is expected as it will decide on its own whether to exempt the rule's application in case of a crisis. While it is commendable that the government has established a stricter fiscal rule than the previous one to demonstrate its commitment to strengthening fiscal soundness, concerns about its effectiveness are already being raised because even if the fiscal rule is legislated, "self-exemption" from the rule's application is possible.

According to the Ministry of Economy and Finance on the 14th, in the future, when exceptions to the fiscal rule arise, the government itself?not an independent fiscal committee?will decide whether to exempt the application of the rule. The decision-making body is expected to be an internal advisory group similar to the Fiscal Policy Advisory Committee, chaired by the Deputy Prime Minister or fiscal authorities.

Previously, the government decided to exempt the application of the fiscal rule in cases of war, large-scale disasters, economic recession, or mass unemployment. This is the same condition as for the supplementary budget (Chugyeong) formulation. While it is relatively easy to judge disasters such as war or COVID-19, economic crises are different.

The government has left room for discretionary judgment on whether to exempt the fiscal rule by not specifying concrete figures related to the criteria for economic recession and mass unemployment. For example, the recession criterion is simply "negative economic growth rate," and the mass unemployment criterion does not specify a concrete figure such as "unemployment rate above ○%." While this flexibility is intended to allow fiscal maneuvering when fiscal roles are needed during crises, it can also be interpreted as meaning that any government judgment could declare an economic crisis at any time. This approach is inconsistent with the global trend, including in Europe and other major countries, where independent fiscal committees decide on exemptions from fiscal rules.

Professor Kim Woochul of the Department of Taxation at the University of Seoul said, "It is not in line with global standards for the government to arbitrarily judge exceptions to fiscal rules," adding, "If the government frequently recognizes exceptions, the rules will lose effectiveness, so the system must be operated with careful judgment." He also suggested, "If the fiscal rule is legislated, specifying numerical criteria for judging economic crises through enforcement ordinances could be an alternative."

Despite the government's strong intention to introduce strict fiscal rules, some concerns arise because the government has repeatedly shown signs of "fiscal addiction." The previous Moon Jae-in administration implemented supplementary budgets totaling 150 trillion won over 10 times, and the current administration executed the largest supplementary budget ever of 62 trillion won immediately after its launch to fulfill presidential pledges.

Moreover, supplementary budgets have become almost routine over the past decade, with hardly any years without them. The government has defined the exceptions to the fiscal rule the same as the conditions for supplementary budget formulation, meaning that the rule's application can be exempted when supplementary budgets are formulated. In fact, from 2013 to 2022, the government implemented supplementary budgets in nine out of ten years, except for 2014. The Moon administration increased welfare spending even before COVID-19 and issued large-scale deficit bonds to fund nationwide disaster relief payments ahead of elections and COVID-19 responses.

Professor Park Jungsoo of the Department of Public Administration at Ewha Womans University pointed out, "Looking back at past supplementary budget cases, there is a risk that fiscal rules will become meaningless even if legislated," adding, "It is meaningful to introduce the system only if the conditions for triggering exceptions are set strictly."

A Ministry of Economy and Finance official explained, "We simplified the fiscal rule compared to the previous plan, strictly regulated the triggering of exceptions and resilience, and overall strengthened compliance standards," adding, "The ratio of national debt repayment from the world surplus fund has been raised from the previous 30% to 50%, so available resources will decrease even if supplementary budgets are formulated in the future." The official emphasized, "This means the government's intention to strengthen fiscal soundness through the introduction of fiscal rules is stronger than ever."

There are also calls for establishing an independent fiscal committee to ensure the effectiveness of fiscal rules. Some suggest utilizing the National Assembly Budget Office, recognized by the OECD as an independent fiscal committee.

Professor Park said, "In Europe, including the UK, independent fiscal committees separate from the Treasury make economic forecasts and decide on economic crises and exemptions from fiscal rules," adding, "It would be desirable for Korea to establish an independent fiscal committee to judge economic crises and supplementary budget formulation, then seek National Assembly approval to recognize exceptions to fiscal rules."

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