[Song Seungseop's Financial Light] 'Fiscal Rules' Stalled at the National Assembly Threshold for Over a Decade

The Difficult 'Fiscal Rules' Efforts of Past Governments
Legislature Holding Back, This National Assembly Also Dragging Its Feet
National Debt 1,000 Trillion... "Is It Even Logical to Have No Rules?"

Editor's NoteFinance is difficult. It is entangled with confusing terms and complex backstories. Sometimes, you need to learn dozens of concepts just to understand a single word. Yet, finance is important. To understand the philosophy of fund management and consistently follow the flow of money, basic financial knowledge must be grounded. Accordingly, Asia Economy selects one financial issue each week and explains it in very simple terms. Even if you know nothing about finance, we light the 'fire' of financial understanding with 'light' stories you can immediately grasp.

Do you have rules you follow when spending money? Wise consumers set rules such as limiting monthly food expenses, never spending over a certain amount on clothes, or saving the next month if they had a big expense like a trip. Without such plans, impulsive purchases are easy to make. The same applies to countries. They set goals on how to manage finances considering the money and debt they have. The law that sets the goals and achievement methods for fiscal management is called 'fiscal rules.'

Regardless of Progressive or Conservative Governments... The Difficult Passage of 'Fiscal Rules'

However, South Korea is a country without fiscal rules. There are no rules about how much money can be spent or how much debt can be incurred. Roughly speaking, the government could suddenly spend a huge amount or accumulate massive debt next year. Among the 38 OECD countries, only South Korea and T?rkiye have never established fiscal rules. Worldwide, 106 countries have introduced and implemented fiscal rules.

The call for fiscal rules has not been absent. Proposals for legislating fiscal rules have been made for over a decade. In 2005, then-Hannara Party lawmaker Lee Jong-gu argued for their introduction, saying, “Since the 1980s, advanced countries institutionalized strict fiscal rules to respond to rapid increases in national debt.” In 2009, Samsung Economic Research Institute analyzed the need for fiscal rules in national fiscal management plans. The following year, Hyundai Economic Research Institute suggested ways to create and implement legally binding fiscal rules.

On October 4, 2016, Choi Sang-mok, then First Vice Minister of the Ministry of Strategy and Finance (currently Senior Secretary for Economic Affairs to the President), is seen speaking at a press briefing for reporters in the main conference room of the Government Sejong Complex.

When the Park Geun-hye administration began in 2013, efforts at the government and ruling party level also started. In 2014, Kim Moo-sung, then leader of the Saenuri Party, said, “It is time to codify fiscal rules and enact laws to prevent reckless increases in national debt.” The next year, the Ministry of Strategy and Finance began work on introducing fiscal rules to strengthen fiscal soundness. This was because national debt was expected to exceed 40% of GDP for the first time, increasing the need to reinforce fiscal soundness. Choi Sang-mok, then the first vice minister of the Ministry of Strategy and Finance and now the presidential secretary for economic affairs, also announced at a press conference that fiscal rules were being prepared. In August 2016, a fiscal rule proposal to cap national debt at 45% of GDP by 2021 was announced for legislative notice.

During former President Moon Jae-in's administration, attempts to introduce fiscal rules were also made. In July 2020, Hong Nam-ki, then Deputy Prime Minister and Minister of Strategy and Finance, said at the National Assembly Budget and Accounts Special Committee, “We are reviewing what kind of fiscal rules South Korea needs.” In October, the Ministry of Strategy and Finance announced plans to introduce fiscal rules again, and by late November, a so-called 'Korean-style fiscal rule' was announced for legislative notice. The plan was to manage the debt-to-GDP ratio within 60% and the integrated fiscal balance within -3% starting in 2025.

Legislature Blocks Fiscal Rules... This National Assembly Also Dragging Its Feet

Despite efforts regardless of the administration, why have fiscal rules still not been introduced? The answer is political issues. The 2016 fiscal rule proposal lost momentum as former President Park was embroiled in the Choi Soon-sil scandal and impeachment process. With the early presidential election and constitutional amendment issues coinciding, the fiscal rule proposal was completely sidelined. It was abolished without several reviews in the relevant standing committee, the Strategy and Finance Committee.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki presiding over the Price-Related Ministers' Meeting held at the Government Seoul Office in Jongno-gu, Seoul, on May 3 last year.

During former President Moon's administration, the National Assembly also obstructed progress. Due to the special circumstances of COVID-19, discussions were delayed for nearly a year and only began in December 2021. Although it was brought to the discussion table, no substantial debate took place. Both ruling and opposition lawmakers reportedly said, “We acknowledge the necessity, but the timing is not right.” This was because the country was approaching a presidential election. Each party was proposing costly pledges to win the next administration, making it difficult to actively introduce fiscal rules.

The fiscal rule proposal presented by the Yoon Suk-yeol administration in September last year is also pending in the National Assembly. It proposed limiting the managed fiscal balance deficit to 3% of GDP and reducing the fiscal deficit ratio to 2% if national debt exceeds 60% of GDP. The review was delayed due to deliberations on various tax support policies, and recently, the Democratic Party of Korea has demanded the passage of the 'Basic Act on Social Economy (Sagyeongbeop),' one of their long-standing projects, as a condition for approval, causing the discussion to stall.

Of course, opposition to fiscal rules, which arises every time an attempt is made to introduce them, is another hurdle. One of the biggest reasons for opposing fiscal rules is the concern that welfare spending will be reduced. There are warnings that Korea's fiscal situation is still sound and that if the government does not bear the burden, household burdens will increase. Academia has also pointed out that the government's fixed fiscal deficit ratio lacks a basis.

National Debt Surpasses 1,000 Trillion Won... "Is It Reasonable to Have No Rules?"

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is delivering a congratulatory speech at the Fiscal Rules Conference held at the Korea Deposit Insurance Corporation in Jung-gu, Seoul, on August 18 last year.

The government insists that introducing fiscal rules is urgent. National debt is rapidly increasing, and if the introduction of fiscal rules is delayed, the debt burden could grow further due to rapid low birth rates and aging. In fact, last year, South Korea's national debt reached 1,067.7 trillion won, surpassing 1,000 trillion won for the first time. The debt-to-GDP ratio hit a record high of 49.6%. Accordingly, Choo Kyung-ho, Deputy Prime Minister and Minister of Strategy and Finance, lamented at a press conference in New York on the 11th, “Is it reasonable that among 106 countries with fiscal rules worldwide, South Korea has none?”

The government also issued a press release rebutting concerns about side effects from fiscal rules. The Ministry of Strategy and Finance explained, “The fiscal rule-related bills under discussion in the National Assembly include exceptions for economic crisis situations that justify supplementary budgets, allowing active fiscal roles. The standards were set comprehensively considering past trends, major advanced countries' cases, and Korea's current debt level to simultaneously secure fiscal roles and fiscal soundness.”

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