[Why&Next] "3 Years of Idling"... The Urgent Need to Introduce 'Fiscal Rules'

Discussions surrounding the introduction of fiscal rules, which began in 2020, have been going in circles for three years. The government estimates that the national debt will exceed 1,100 trillion won this year and views the legalization of control measures as urgent. They argue that a control mechanism should be put in place for national fiscal input to reduce reckless spending and secure fiscal soundness. However, some agree with the introduction of fiscal rules but point out that it is premature to immediately restrict government spending considering the low-growth phase. They emphasize the need for spending to stimulate the economy at a level that the national debt can bear.

The importance of fiscal rules lies in their deep connection to national debt and national competitiveness. National debt refers to the debt incurred when the government borrows funds domestically and internationally to cover fiscal deficits. According to the Ministry of Economy and Finance, as of April this year, the national debt stands at 1,072.7 trillion won. It is estimated to reach 1,134 trillion won by the end of this year, pushing the national debt-to-GDP ratio beyond 50%. If national debt continues to increase, there is a high possibility that national competitiveness will weaken. National competitiveness is a criterion for judging whether a country is a 'good place to do business,' meaning whether companies can enhance their competitiveness. Therefore, a decline in national competitiveness means the country is increasingly seen as a difficult place to do business internationally. This is why South Korea, where attracting foreign investment is crucial, closely monitors annual international national competitiveness evaluations.

In the recent '2023 National Competitiveness Ranking' released by the Swiss International Institute for Management Development (IMD), South Korea ranked 28th. This is slightly above the midpoint among the 64 countries evaluated. South Korea maintained 23rd place for two years from 2020 to 2021 but dropped four places to 27th last year and fell one more place this year. What is important is how IMD evaluates national competitiveness. IMD calculates national competitiveness rankings based on four categories: economic performance, government efficiency, business efficiency, and infrastructure. Notably, South Korea's decline is most apparent in the 'government efficiency' category. This year, South Korea rose eight places to 14th in economic performance, and business efficiency (33rd) and infrastructure (16th) remained the same as the previous year, but government efficiency was the only category to fall by two places. Particularly, within the five detailed items, the fiscal sector dropped eight places to 40th compared to the previous year.

The fiscal sector has led the decline in national competitiveness. The longer the introduction of fiscal rules is delayed, the more the vicious cycle of deteriorating fiscal soundness → increasing national debt → declining national competitiveness is completed. Professor Kang Sung-jin of Korea University’s Department of Economics warned, "The national debt, which was about 680 trillion won for a long time, has rapidly surged to 1,000 trillion won in the past five years," adding, "The greatest risk caused by deteriorating fiscal soundness is that the increased debt burden on future generations weakens growth potential."

Population structure issues due to low birth rates and aging are also cited as factors increasing fiscal burdens. As South Korea’s population ages, social costs rise, placing additional pressure on national debt. Although the government is working on productivity enhancement by pursuing three major reforms (labor, education, and pensions) to prepare for aging, tangible results remain insufficient. Kim Hak-soo, Senior Research Fellow at the Korea Development Institute (KDI), expressed concern, saying, "If the overall economic structure is not improved amid rapidly worsening population structure, the economic fundamentals will weaken." The international credit rating agency Moody’s advised that South Korea must manage fiscal burdens such as reduced tax revenues due to tax reforms and increased spending from aging through the introduction of fiscal rules.

On the other hand, some argue that legalizing fiscal rules during difficult economic times like now could rather hinder progress. They claim that restricting spending might prevent government-led economic stimulus measures, such as supplementary budgets, from working effectively. They view the steady decline in tax revenues as a signal of economic difficulty and emphasize that supplementary budget formation and fiscal rules should be discussed together in the second half of the year. National tax revenue collected until April this year was 134.1 trillion won, down 33.9 trillion won compared to the same period last year. Accordingly, the managed fiscal balance, which reflects the actual state of national finances, recorded a deficit of 45.4 trillion won.

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