[News Terms] The 'Fiscal Rule' That Failed to Meet Next Year's Budget Again

Although the government tightened its belt by drafting a tight budget for next year (656.9 trillion won), which is only a 2.8% increase from this year's main budget, the managed fiscal balance deficit for next year has expanded to 3.9% of the Gross Domestic Product (GDP), exceeding the fiscal rule deficit limit (3.0%) set by the government. As the government, which is promoting the introduction of fiscal rules, finds itself in a contradictory situation where it cannot comply with them, the issue of 'fiscal rules' is becoming a topic of discussion again.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho is delivering opening remarks during a detailed pre-briefing on the '2024 Budget Proposal and the 2023-2027 National Operation Plan' held at the Government Complex Sejong on the 24th.

Fiscal rules refer to norms that assign specific target figures to national fiscal soundness indicators such as national debt or fiscal deficits and manage them so as not to exceed these targets. Typically, they consist of ▲legal foundations such as the constitution, laws, guidelines, and international agreements ▲aggregate fiscal targets such as fiscal balance, national debt, and total expenditure ▲sanctions such as judicial, monetary, or credit penalties imposed if fiscal rules are not followed.

When fiscal rules are introduced according to such guidelines, they enable the management of the deficit size of the national budget to not exceed a certain level, serving as a mechanism to control reckless expansionary fiscal policies. Since the 1990s, when fiscal rules were established in Europe, many countries around the world have adopted them, and currently, more than 100 countries operate fiscal rules. Among OECD (Organisation for Economic Co-operation and Development) member countries, only South Korea and T?rkiye have not introduced them.

Legislation of fiscal rules in Korea began discussions in October 2020 when the Moon Jae-in administration submitted the 'Korean-style fiscal rules' to the National Assembly, but it is still stalled due to significant differences between ruling and opposition parties.

The core of the Korean-style fiscal rules prepared during the Moon Jae-in administration is that from 2025, the national debt ratio relative to GDP should be managed within 60%, and the integrated fiscal balance ratio should be managed within -3%. It was also designed so that if either of the two conditions is met, the fiscal rules would not apply. For reference, the integrated fiscal balance refers to the balance encompassing the general account, special accounts, and funds for the relevant year.

The core of the fiscal rules being revised and promoted by the Yoon Suk-yeol administration, which took office in 2022 based on this, differs from the previous fiscal rules that used the integrated fiscal balance by utilizing the managed fiscal balance relative to GDP (the fiscal balance calculated by subtracting social security fund balances such as National Pension, Private School Pension, Employment Insurance, and Industrial Accident Insurance from the government's total revenue minus total expenditure) and managing this figure so that it does not exceed -3%. Additionally, if the national debt ratio relative to GDP exceeds 60%, the upper limit for the managed fiscal balance is reduced to -2% to prevent further increases in the national debt ratio. A revision bill to the National Finance Act containing these provisions has been proposed and is currently pending in the National Assembly.

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