[Insight & Opinion] Fiscal Management Matters More Than Fiscal Rules

The government announced fiscal rules last September that manage the deficit based on the managed fiscal balance to remain within 3% of GDP, and if the national debt ratio exceeds 60%, to reduce the deficit ratio to within 2%. It is now pushing for legislation. The introduction of fiscal rules is one of the Yoon Seok-yeol administration’s national agenda items. Fiscal rules are a system that controls the government’s fiscal management. It means setting limits on key fiscal soundness indicators such as the national debt ratio and managing so as not to exceed them. It is true that public opinion is divided. Some voices say that the rules should be introduced quickly to reduce debt and operate finances efficiently, but there are concerns that it could act as an obstacle restricting necessary government spending. There is also criticism that under the current method, it is possible to meet the numbers simply by adjusting the timing of expenditures, making it meaningless.

The history of pushing for the introduction of fiscal rules in Korea is long. During the Moon Jae-in administration in 2020, a ‘Korean-style fiscal rule’ was prepared with the national debt ratio set at 60% of GDP and the deficit ratio based on the integrated fiscal balance set within 3%, with plans to apply it from 2025, but it did not lead to legislation. The Park Geun-hye administration in 2016 also tried to legislate a plan to manage the national debt ratio within 45% and the deficit ratio based on the managed fiscal balance within 3%, but it also did not become law.

Despite repeated attempts by successive governments, the failure to legislate was actually because the government or ruling party did not want to make an effort to tie their own hands. In principle, if increasing deficits is undesirable and the rise in government debt is a concern, the government should take the initiative to strive for sound finances before anyone says anything. If spending is high and needs to be reduced, simply spending less is enough; there is no need to put a note on the desk saying to save. The government does not need to make a separate law; it just needs to reduce debt and not increase the budget on its own. The problem is not opposition parties or some public dissent, but the will of the government and ruling party.

While emphasizing sound finances through fiscal rules, the current government is also pursuing tax cut policies. Due to last year’s legal amendments, fiscal revenue is expected to decrease by more than 17 trillion won annually over the next five years starting this year. Expenditures are estimated to increase by nearly 800 billion won annually. An annual deficit factor of 18 trillion won has already occurred. The tax system changes, such as reducing earned income tax burdens for low-income groups, lowering corporate tax to stimulate investment, and normalizing comprehensive real estate tax, all have their reasons, but short-term fiscal soundness deterioration is unavoidable. The speed of tax collection is also the lowest in 18 years. The combination of tax cuts and revenue decline is expected to create a shortfall of about 10 trillion won in tax revenue by the end of the year, according to authorities.

Whatever the reason, if collected taxes are less than expenditures, the government must borrow. The managed fiscal balance is expected to record a deficit of more than 110 trillion won last year. If a deficit is recorded this year as well, it will be the 16th consecutive year of deficits since 2008. Fiscal rules are created to restrict fiscal management where principles are not observed.

Even to avoid being swayed by political pressure, having rules is better than having none. However, what is more important is fiscal management that truly aligns with the intent of the fiscal rules. As with all things, systems alone are never enough.

Kim Sang-cheol, Economic Columnist

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