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[Editorial] Flawed scheme

Measures proposed by the government not enough to ensure fiscal soundness

The Ministry of Economy and Finance this week announced plans to introduce fiscal rules in 2025 amid growing concerns over the country’s soaring national debt.

A bold increase in government spending is somewhat inevitable to help cushion the economic impact of the prolonged coronavirus crisis. But even before the outbreak of the pandemic here early this year, President Moon Jae-in’s administration indulged in reckless spending to finance what critics see as populist welfare and employment programs.

According to the current fiscal management plan, South Korea’s national debt is projected to rise by more than 400 trillion won ($344 billion) in 2017 to 1,070 trillion won in 2022, the final year of Moon’s five-year presidency.

The country’s national debt as a percentage of its annual gross domestic product, which stood at 37.7 percent in 2019, is estimated to reach 51.2 percent in 2022. If left unchecked, the figure is forecast to exceed 75 percent by 2030.

Such alarming prospects have strengthened the need for the country to adopt debt and deficit rules to protect fiscal soundness. So far, 92 other states around the world have taken such measures.

The plan announced by the Finance Ministry seems insufficient to rein in excessive fiscal expenditure down the road. Rather, it is being criticized for allowing the Moon government to increase fiscal spending regardless of how appropriate it is.

Under the proposed rules, Korea’s national debt-to-GDP ratio should be kept at 60 percent and the deficit in its consolidated fiscal balance could not exceed 3 percent of GDP.

Global rating agencies have put the appropriate level of the country’s debt-to-GDP ratio at slightly over 40 percent.

Moon’s predecessors tried to keep the ratio at 40 percent. When he was an opposition leader, Moon criticized then-President Park Geun-hye’s administration for breaching the level, calling it the “Maginot Line to protect fiscal soundness.”

The 60 percent bar laid by the Finance Ministry goes against the purpose of introducing fiscal rules, which should be to prevent fiscal conditions from deteriorating and to improve them.

The ministry’s goal to limit the deficit in consolidated fiscal balance -- instead of managed fiscal balance -- to 3 percent of GDP would also leave more room for expanding fiscal deficit. Managed fiscal balance, which excludes large sums of social security funds from consolidated fiscal balance, paints a more accurate picture of fiscal conditions.

Moreover, applying such fiscal rules from 2025 would give the Moon administration and the ruling Democratic Party of Korea a free hand to increase fiscal expenditure for the remainder of Moon’s term in office. Opposition lawmakers and other critics have raised concerns that the government might put forward more populist programs to help ruling party candidates win two key mayoral elections in Seoul and Busan next year and the next presidential vote in 2022.

The proposed rules also allow for many exceptional cases, in which the government will not be obligated to observe them.

They will be exempted from implementation in times of a war, natural disasters and an economic crisis. The maximum fiscal deficit will also be hiked from 3 percent of GDP to 4 percent in an economic recession.

Certainly, it is necessary to expand fiscal spending in emergencies.

But the problem is it will be up to arbitrary judgments by government officials susceptible to political power to define whether the country is in an economic crisis or recession.

Korea’s economy might be drawn into habitually critical situations if the anti-corporate policies pursued by the Moon government continue to be implemented by the next administration amid a plummeting birthrate and a rapid population aging. If so, the country might see its national debt grow out of control.

After announcing the planned fiscal rules, Finance Minister Hong Nam-ki said the government would spare no efforts to simultaneously maintain “fiscal responsibility” and “fiscal sustainability.” But it seems unlikely that he will keep his pledge under the proposed rules.

During their deliberations on a related bill to be submitted by the government, lawmakers need to work out measures to make the proposed rules more specific and binding.

Some ruling party lawmakers seem reluctant to tighten or even introduce the rules. But it should be reminded that in opposition, their party called for a stricter control on fiscal deficits.
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