Kim Moon-soo, the People Power Party candidate, has officially adopted the 'introduction of fiscal rules' as a campaign promise, while Lee Jae-myung, the Democratic Party of Korea candidate, has made no particular mention of it. Fiscal rules refer to regulations that manage national debt to keep it below a certain level of the Gross Domestic Product (GDP).
If this law becomes reality, there will be limits on increasing the budget, allowing for the pursuit of fiscal soundness. However, in times of economic downturns when expansionary budgets are needed, it could prevent increasing expenditure. During his term as governor of Gyeonggi Province, the candidate expressed a negative view about the introduction of fiscal rules, noting that it is 'not a global trend.'
According to political circles on the 2nd, the candidate has pledged to manage fiscal performance to promote efficiency instead of legislating fiscal rules. The candidate stated in the presidential campaign policy book the intention to evaluate the performance of projects and reflect this in the budget and settlement of account.
Additionally, the candidate aims to establish a fiscal performance management system focused on administrative efficiency, welfare expansion, economic growth, and stability. The candidate also plans to address potential waste in budget execution by strengthening economic feasibility evaluations on underperforming and redundant projects.
Meanwhile, there was no mention of fiscal rules. A representative from Lee Jae-myung's camp explained, 'The presence or absence of rules isn't what's important for fiscal soundness,' and stated, 'Stability in revenue and expenditure is necessary.' This contrasts with Kim's proposal to use fiscal rules as a way to create a fiscally strong and sustainable country.
Fiscal rules are laws that enforce fiscal indicators, such as government debt, to not exceed a certain level. Under the Park Geun-hye administration, it was pursued with a guideline of keeping the national debt ratio to GDP under 45% and consolidated fiscal balance without social security fund deficits under 3%, but it failed to pass the National Assembly. Subsequently, the Moon Jae-in administration sought to push more lenient guidelines (60% of GDP for national debt and deficits under 3% for the consolidated fiscal balance), but the outcome was the same. The Yun Seok-youl administration also faced similar hurdles with guidelines of deficits under 3% of GDP for the consolidated fiscal balance without social security fund.
The enforcement of fiscal rules to keep government debt within a certain percentage of GDP has both pros and cons. A benefit is controlling national debt, but if needed funds cannot be spent, it could lead to economic contraction.
The Ministry of Economy and Finance advocates for the introduction of fiscal rules for the former reason, but the Democratic Party focuses more on the latter. At the end of last year, Han Dong-hoon, then leader of the People Power Party, raised the legislative issue of fiscal rules, but the Democratic Party practically opposed it, citing the risk of entrenched low growth.
The candidate has also shown a negative stance towards fiscal rules. In 2020, when the impacts of COVID-19 were becoming evident, Lee Jae-myung, then governor of Gyeonggi Province, posted on Facebook, 'Our economy is at risk of freezing unless we ease household burdens and increase expenditure to open up the cycle,' and 'The perception of the Ministry of Economy and Finance and the Central Bank's head is solely focused on managing government debt. It is truly frustrating.'
In a campaign rally in Incheon on the 21st of last month, the candidate said, 'There are ignorant remarks about the national debt exceeding one thousand trillion won and claiming that a country should never go into debt.' The candidate added, 'If the government doesn’t spend money now, then when will it?' and cautioned against being deceived by criticism over the national debt exceeding one thousand trillion won. If elected, the candidate promised to first establish an emergency economic response task force (TF) under the direct command of the president, viewing the economic situation of our country as serious.
With the introduction of fiscal rules, major campaign promises costing trillions of won would face red lights. The candidate has promised to extend the current children's allowance for 8-year-olds (100,000 won per month) to 18-year-olds and introduce a basic income for rural areas (equivalent to 150,000-200,000 won per month in local currency). According to a long-term government debt estimate by the Policy Evaluation Research Institute, if such major promises are implemented, national debt would increase by 202.5% by 2055 compared to the end of 2023. However, this figure is also significant for Kim, who promised to lower the highest tax rates on inheritance and corporate taxes, with government debt projected to grow by 199.9% over the same period if Kim's pledges are carried out.
Considering the Democratic Party's majority in the National Assembly, there is little need for the candidate to introduce fiscal rules. By law, to increase the budget, the National Assembly must obtain the approval of the executive branch, that is, the Ministry of Economy and Finance. Historically, the ministry has largely accommodated bipartisan agreements on budget increases. Although a system allowing for mutual checks between the executive branch and the National Assembly in the budget decision process is in place, it is not effectively implemented.
In such a situation, fiscal rules could be used by the Ministry of Economy and Finance as a defensive tool to prevent budget increases. The ministry could argue against increasing the budget beyond levels prescribed by law by citing that it is 'against the law.'
One official from the Ministry of Economy and Finance stated, 'If both parties agree to increase the budget, the government has almost always complied,' and noted, 'The introduction of fiscal rules could prevent this scenario.' Another official added, 'If the National Assembly significantly increases the government’s budget proposal, as during the COVID-19 period, fiscal rules could work to diminish the legislature’s power.'
As of early this month, including the supplementary budget of 13.8 trillion won, the national debt stands at 1,280.8 trillion won. This represents 48.4% of GDP, and the consolidated fiscal balance without social security fund deficit is at 3.3%.