Government to Adopt National Fiscal Rules
The Korean government announced new fiscal rules on October 5, which will take effect from 2025 after a transition period of three years. The summary of the national fiscal rules and the background against which the fiscal rules are drawn up are as follows.
Background
Although Korea’s government debt to GDP is low at 40 percent as of 2018 compared with other OECD countries of which the average debt posts 108.9 percent, we have been concerned about the speed at which government debt increases. We tried hard to maintain the country’s fiscal soundness amid increasing fiscal spending associated with the pandemic, such as by restructuring spending to finance four supplementary budgets[1]. IMF analyzed that Korea’s debt to GDP would increase by 7.6 percentage points next year, while government debt in developed countries would increase by over 20 percentage points in average. However, there is a consensus in the country that we need appropriate fiscal rules in debt management and budget balance to secure fiscal sustainability.
Fiscal outlooks given by the government as reasons for national rules
- Government debt (D1) to post 43.9 percent in 2020, up 6.2 percentage points from 2019
- Consolidated fiscal balance without public funds to post a deficit of 6 percent, down from a 2.8 percent deficit in 2019
- Government debt to run toward 60 percent in 2024 due to consequences of COVID-19 fiscal spending
- Fiscal soundness required to be managed in the mid- to long-term given low birth rates and fast ageing population, growing welfare costs, and inter-Korean relations
National fiscal rules
1. Maintain fiscal soundness: (government debt to GDP/60%) x (consolidated fiscal balance/-3%) ≤ 1.0, which means government debt does not exceed 60 percent to GDP and the consolidated fiscal balance deficit does not go beyond three percent to GDP, but at the same time the two indicators are complementary, giving room for flexibility
2. Three components of the formula
- Debt ratio limit of 60 percent to GDP set after taking into account the current debt ratio, mid- to long-term fiscal conditions and growing welfare spending, as well as consequences of increased spending this year due to COVID-19 reliefs, including the debt outlook for 2024 of nearing 60 percent
- Three percent deficit in consolidated fiscal balance set after taking into consideration this year’s deficit of over four percent due to four supplementary budgets, as well as budget balance outlooks for 2021 and 2022[2]
- Make it mandatory for the government to work on improving fiscal soundness when it fails to meet the formula, such as by improving spending efficiency, increasing revenues and reducing budget deficits
Guidelines
Transition period
There will be a transition period of three years before the national fiscal rules are introduced in the 2025 fiscal year, which reflects 2024 fiscal conditions.
Exceptions (escape clauses)
1. When extraordinary challenges, such as the COVID-19 pandemic this year, strike the economy, the rules will not apply for the year, and the ratios are to be recovered gradually over the four years that follow
2. When economic slowdown requires expanded fiscal spending to stimulate growth, support employment and promote production, the three percent consolidated fiscal balance deficit rule will be eased by one percentage point to a four percent deficit
We will review the rules every five years taking into account changes in fiscal conditions, and will mandate financing plans when proposing law revisions that will lead to an increase in fiscal spending. The current debt repayment rule which requires 30 percent of excess revenues to be spent on paying back will be raised to 50 percent.
The government will propose the rules at the National Assembly for lawmaking procedures.
