"The World's Highest Increase in National Debt Ratio... Urgent Need to Enact the 'Fiscal Rules Act'"

FKCCI Urges Passage of Pending Fiscal Rules Bill in National Assembly
"Highest Increase in National Debt Ratio Among OECD Post-COVID"

The Federation of Korean Industries (FKI) urged the National Assembly on the 18th to promptly pass the fiscal rules bill. They emphasized the need to expedite expenditure restructuring as the increase in national debt is the highest among major advanced countries.

The FKI stressed that the National Assembly should quickly pass the fiscal rules bill, which has been stalled for 10 months since its proposal in September last year. The bill, primarily proposed by Park Dae-chul of the People Power Party, includes a provision to limit the management fiscal balance deficit (the value obtained by subtracting social security fund balances such as the National Pension and Employment Insurance from the integrated fiscal balance) to 3% of the gross domestic product (GDP). If the national debt-to-GDP ratio exceeds 60%, the upper limit is lowered to 2%.

However, the bill sparked controversy because it sets the national debt standard as D1 (central and local government debt). At the end of last year, the National Assembly's Planning and Finance Committee pointed out that the standard should be changed to D2 (D1 plus non-profit public institution debt) to properly assess the national debt status. In April, the International Monetary Fund (IMF) released a fiscal monitor report estimating Korea's D2 ratio at 54.3% at the end of last year.

Whether D1 or D2, the rapid increase in debt makes it urgent to enhance fiscal soundness, the FKI pointed out. The FKI listed five reasons why the legislation of fiscal rules is urgent. They stated that ▲ since COVID-19, Korea has had the largest increase in national debt ratio among OECD member countries, ▲ low birth rates have lowered growth potential, ▲ aging has increased costs such as welfare expenditures, ▲ risks from public enterprise debt and pension liabilities are significant, and ▲ 29 out of 38 OECD countries (76%) have established fiscal rules laws, so Korea should quickly legislate as well.

Deputy Prime Minister for Economy Choo Kyung-ho briefing on the "2023 Second Half Economic Policy Direction" at the Government Seoul Office in Jongno-gu, Seoul on the 4th.
[Photo by Dongju Yoon doso7@]

The FKI used IMF statistics to calculate the change in GDP-based D2 among 37 OECD member countries (excluding Costa Rica) from 2020, during the COVID-19 pandemic, to 2028. The average is expected to decrease by 8.8 percentage points (p) from 78.8% in 2020 to 70% in 2028. In contrast, Korea's ratio is projected to increase by 9.5 percentage points from 48.7% to 58.2% during the same period. Among the countries, Korea shows the largest increase.

The FKI diagnosed that due to low birth rates and aging, there are many expenditures, while public enterprise and pension debts have ballooned like a snowball. Korea's working-age population (ages 15-64) began declining in 2018, and the potential growth rate is expected to turn negative by 2047. Population decline and growth slowdown lead to reduced tax revenue. As tax revenue decreases, government finances shrink. Social welfare costs are high. Korea's social welfare fiscal expenditure ratio to GDP is expected to nearly double from 14.4% in 2020 to 27.6% in 2060.

Public enterprises and pension management institutions are burdened with massive debt. Non-financial public enterprise debt relative to Korea's GDP was 21.2% as of 2021. Pension liabilities stood at 54.6% as of last year. Compared to countries that compile similar statistics such as the United States, Japan, Australia, and the United Kingdom, Korea's figures are the highest. The combined amount of D2 including public enterprise and pension liabilities exceeds GDP. As of the end of 2021, it was 123.6% of GDP.

Despite this situation, Korea's progress in establishing fiscal rules legislation lags behind major countries. As of 2021, the IMF reported that 35 out of 38 OECD countries (92%) have implemented fiscal rules, and 29 countries (76%) have legislated them. Korea has yet to establish fiscal rules.

Choo Kwang-ho, head of the Economic and Industrial Headquarters at the FKI, said, "Not only is Korea's national debt increasing faster than major countries, but there are many fiscal risk factors such as low birth rates and aging. We must promptly legislate fiscal rules and actively restructure expenditures to establish a foundation for sound fiscal management in the future."

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