Fiscal rule setting should not be further delayed

The South Korean government announced on Tuesday that it will additionally prepare 10 trillion won for the next year’s budget plan by restructuring its expenses. It intends to normalize the Moon Jae-in administration’s expansionary fiscal stance with four fiscal overhaul plans, including reducing projects with poor execution, merging and abolishing various funds, improving the allocation efficiency of educational resources for schools, and normalizing temporary spending for disease control. It forewarns a major shift in the current administration’s fiscal projects for next year’s budget plan by reducing or abolishing the South Korean New Deal and inclusive leading country transition initiatives.

Such a ‘budget diet’ is prompted by a sense of crisis that the national debt has reached a threshold due to stimulus checks for COVID-19 and welfare projects during the last few years. International credit rating agency Fitch Ratings expressed concerns that South Korea’s national debt can be a pressing factor on the country’s credit rating in the middle to long term. While the issue at hand is worrisome, the country is facing a structural crisis of accumulating an annual deficit of more than 100 trillion won by 2025. Welfare projects are snowballing and pressuring the country’s finances.

What’s problematic is that spending restructuring itself is not easy and that an astronomical amount of money is required to carry out pledges made by the next administration. Half of South Korea’s 600-trillion-won main budget is mandatory expenses. The discretionary expense could be reduced to an extent but a significant reduction is not feasible as it includes rigid expenses, such as national defense expenditure. In addition, it is concerning how to prepare funds necessary to carry out pledges made by President-elect Yoon Suk-yeol, such as basic pension for the elderly, soldiers’ pay raise, and support for small business owners, which requires the second revised supplementary budget of 50 trillion won. This is the result of arbitrarily expanding fiscal projects without clear criteria to determine financial input.

Amid the situation where both internal and external crises are repeating, such practices will not resolve fiscal deficits and leave an excessive burden on the next generation. Only fiscal rules that limit national debt and fiscal deficits to certain levels will play the role of a safety valve to prevent irresponsible finance management and enable the flexible management of supplementary budgets. Thirty-four countries out of 36 OECD members have introduced fiscal rules, while South Korea has not even a year after such rules were submitted to the National Assembly at the end of 2020. It is only an empty word to call for fiscal normalization without minimum criteria to manage national finance.