Value context and insight. lkm@koreatimes.co.kr
Experts question efficacy of gov't measures to bolster fiscal soundness
Deputy Prime Minister and Finance Minister Hong Nam-ki, left, speaks during a press briefing at Sejong Government Complex, Monday. Yonhap
By Lee Kyung-min
Objective to keep debt-to-GDP ratio lower than 60%, deficit less than 3% of GDP
By Lee Kyung-min
The government has outlined a long-term fiscal plan, Monday, as part of preemptive measures to better manage fast-growing debt amid rising mandatory spending brought on by expanded social and welfare programs due to the rapidly aging population.
A sweeping further effort will be required to reduce expenditure by scrapping redundant, counter-effective state-run projects, a move pivotal to reduce fiscal deficit soaring rapidly without little improvement in overall productivity.
Altering specifics to ease related rules will be banned in principle unless the government presents ways to increase revenue, a buffer that will help limit arbitrary fiscal discretion expanding gradually in line with continued expansionary policy directives over the past few years.
Experts question the efficacy of the slew of measures set to take effect in 2025, as they merely function as a guidance and can be waived in the event of economic crisis brought on by natural disasters or virus-induced pandemic.
The Ministry of Economy and Finance said the government will seek to keep the government debt-to-GDP ratio under 60 percent, while limiting the consolidated fiscal deficit to less than 3 percent of the country's GDP. A deficit of up to 4 percent of GDP will be allowed in limited situations following an economic crisis defined by a clear slowdown illustrated by industrial output and employment data.
The ratio stands at 43.9 percent in 2020, if it factors in the 67 trillion won ($57 billion) injected via four extra budget bills drafted to fund emergency stimulus packages to fight the economic damage generated by the COVID-19 pandemic. The figure is up 6.2 percent from the year before and is expected to hover at a range of between 56 and 59 percent by 2024.
Seoul National University economist Kim So-young said the guidelines are clearly loose, indicated by the deficit measured on a consolidated basis, an inaccurate method of gauging fiscal health as it included four surplus-reporting social funds including national health insurance.
“The government has long measured deficit excluding four social funds, as it was more accurate way to measure fiscal health, which the new rule conveniently is designed to neglect. It is highly worrisome.”
The government leaving specifics to be determined by Presidential decrees or ordinances instead of the law, is another tactic to exercise discretion to change the law in a way that best suit the administrative directives, he added.
“Presidential decrees can be set by relevant government agencies, a far faster way to than via legislature subject to parliamentary gridlock. It signals that the administrative officials want room to maneuver against possible uncertainty in the years to come brought on by political developments,” he said.
According to a fiscal outlook report for 2020 through 2060 released Sept. 2 by the ministry, Korea's debt-to-GDP ratio is expected to soar to 81.1 percent in 2060, nearly double the 43.5 percent this year.
This was premised on that the economic and fiscal policies would remain unchanged from the status quo. The figure will jump further to 92 percent if the government puts in place a mandatory spending of 60 trillion won from 2025 to 2060 due to a spike in interest payments on government debt as well as payouts to subscribers of the state pension system and elderly low-income earners. But the figure can be limited to 64.5 percent if material improvement is drawn from government efforts to tackle low birthrates and bolster productivity.