Cutting Discretionary Spending by Over 10%... Fiscal Rules Seem Difficult to Achieve

Ministry of Economy and Finance Budget Fund Operation Plan
Changes to Moral Hazard Leakage Project Standards
Reform of Rigid Expenditures
Ministry of Economy and Finance: "Sound Fiscal Policy to Be Established Next Year"

The government will continue to pursue strong expenditure structure reforms next year, following this year. In addition to restructuring that cuts all discretionary spending except for national tasks by more than 10%, it plans to reform rigid expenditures by identifying projects with leakages caused by moral hazard and changing support criteria. Efforts to improve spending efficiency, such as re-examining budget projects from the ground up, will also continue. However, despite these efforts, it appears difficult to achieve the fiscal rules set by the Yoon Suk-yeol administration as a national task.

According to the "Guidelines for Budget Drafting and Fund Operation Plan Preparation" announced by the Ministry of Economy and Finance on the 26th, the government decided to reduce discretionary spending by 10% next year. Discretionary spending refers to the budget that the government can adjust in scale according to policy intentions. It excludes mandatory spending such as national debt interest or statutory welfare expenditures, as well as rigid expenses.

This year, rigid expenditure projects will also be completely reformed. Rigid expenditures refer to social security spending that must be spent according to law or budgets that are difficult to adjust. Since welfare such as the National Basic Livelihood Security benefits and various pensions are typically included, adjustment has been difficult even under the current government. Nevertheless, as the proportion of mandatory spending in the national fiscal management plan already exceeded 53.3% last year and is expected to reach 56.1% by 2027, this is interpreted as a demonstration of the government's determination to restructure.

First, the government will check whether there are any leakages in rigid expenditures. This involves identifying spending projects where moral hazard concerns arise, such as checking for fraudulent claims in social insurance. If loopholes are found, even rigid expenditures will have their support criteria and levels improved. The Ministry of Economy and Finance plans to establish a sound fiscal stance by completing improvements in rigid expenditures next year, following the cleanup of COVID-19 budgets last year and adjustments to subsidy projects this year.

Re-examining Projects for Spending Efficiency... Removing Barriers Between Funding Sources

Kim Dong-il, Director of the Budget Office at the Ministry of Economy and Finance, said, “Discretionary spending (purely estimated) is about 120 trillion to 140 trillion won,” adding, “Last year, when drafting this year’s budget, we mentioned a reduction of 23 trillion won, but in reality, we cut 24 trillion won, which is 20%.” He added, “After reviewing the overall situation of next year’s budget, we will examine the specific amount of discretionary spending.”

The government will continue zero-based evaluations that re-examine the validity and effectiveness of all fiscal projects from scratch. Policies judged to have insufficient performance in subsidy project extension evaluations, autonomous fiscal project evaluations, and job project evaluations will have their budgets cut or be abolished.

Barriers between funding sources will be removed. Funds or accounts with surplus resources will be transferred or deposited into other funds/accounts to enable efficient project operation. Accordingly, the role of funds with surplus resources, such as education grants, is expected to change partially.

Self-imposed Fiscal Rules... Likely Difficult to Achieve Next Year as Well

Although the government plans to maintain a sound fiscal stance unwaveringly next year, it is difficult to achieve the core fiscal rules. The Yoon Suk-yeol administration is promoting the legislation of fiscal rules as a national task, with the key being to keep the managed fiscal balance deficit ratio within 3% of the Gross Domestic Product (GDP). The problem is that the Ministry of Economy and Finance, which emphasizes fiscal rules, is failing to meet the standards it set itself. The managed fiscal balance deficit ratio to GDP was 5.4% in 2022, and this year it is expected to exceed the standard at 3.9%.

A major tax cut policy is cited as a factor making it difficult to achieve fiscal rules. The government abolished the financial investment income tax that was to be implemented next year. The government and the National Assembly Budget Office expected about 800 billion won in tax revenue from the financial investment tax, but this was nullified. The temporary investment tax credit measure was also extended by one year, resulting in an expected tax revenue decrease of 1.5 trillion won, and expanding tax benefits for Individual Savings Accounts (ISA) is expected to reduce taxes by 300 billion won. Recently, as part of the corporate value-up program, the government proposed reducing corporate taxes for companies that cancel treasury stocks or increase dividends.

The Ministry of Economy and Finance initially maintained the position of adhering to fiscal rules next year. According to the 2023?2027 National Fiscal Management Plan submitted to the National Assembly last year, the managed fiscal balance deficit for next year is 72.2 trillion won. This corresponds to 2.9% of GDP, which complies with the fiscal rules. At that time, the government stated that after next year, it would manage the deficit ratio within 3% according to the fiscal rules. If the plan is implemented normally, the indicator should decrease to 2.5% by 2027.

Yoo Byung-seo, Chief Budget Review Officer at the Ministry of Economy and Finance, explained, “The government has shifted to a sound fiscal stance and will establish it next year,” but added, “Although there has been talk about the rules, it is difficult to achieve balanced budgets immediately because the previous administration greatly increased the deficit.”

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