Korea to transition government finances to focus on soundness

The South Korean government has decided to hold its state finance strategy meeting within this week and transition the mode of its government finance operation to one focused on ‘strengthening of soundness.’ The government thus intends to manage state finances in a way that ensures that national debts, which increased 415.5 trillion won (about 320 billion US dollars) during the former Moon Jae-in administration to exceed 1,000 trillion won (about 770 billion dollars), will not increase rapidly further. The government also plans to present specific numbers for fiscal balance and targets for government debt management yearly through the end of the incumbent government’s term in office.

The ratio of Korea’s national debt to GDP, which stood at 36 percent in the early days of the previous administration, reached nearly 50 percent this year, and if the current trend of expansionary state finance continues, the ratio is set to reach 69.7 percent in 2026, the final year of the incumbent administration. Considering that G7 nations including the U.S., the U.K., and Japan, have all switched to tapering from last year to reduce national debts that surged during the Covid-19 pandemic, Korea is lagging behind others in taking countermeasures.

Global credit rating agencies are paying close attention to rapid growth of Korea’s national debts. It means if the nation’s state finances, which served as the steppingstone for Korea’s recovery from the Asian financial crisis and the 2008 economic recession, Korea could see its sovereign credit ratings decline. It is for this reason that state finance rules, which will be strictly enforced by law, need to be introduced to Korea during the incumbent administration. Among OECD member states, only Korea and Turkey have no such state finance rules in place, while Germany has state finance rules that are included the Constitution.

President Yoon Suk-yeol also said that he will put in place government finance rules within the first year during his term in office as one of his election pledges. However, introduction of state finance rules requires cooperation by political circle. The Strategy and Finance Ministry submitted a draft of state finance rules to the National Assembly during the previous administration with the aim of starting implementation in 2025, but both ruling and opposition parties turned a blind eye. Even though the draft was criticized for having sloppy standards while the rules were devised only as executive ordnance rather than law, the political circles nevertheless regarded the rules as a shackle that would block the political circles from expanding state expenditures ahead of the presidential election.

A bigger problem is that while the incumbent government is concerned about expansionary finances and mounting national debts, it still continues to increase rigid expenses. While the government vows to cut in half ‘budget for tax-based jobs’ set aside by the previous administration by citing wasting of taxpayers’ money and to restructure state-run companies that add costs to the state budget, it is nevertheless set to push ahead with hike, in basic pension for senior citizens and pay for military service members. These measures are hardly compatible with each other. In order to end the vicious cycle of competitive lavish, populistic government spending by different administrations, the current administration should take the lead by halting the practice of pork barreling, ideological spending for their own political supporters.