Fiscal loopholes

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Fiscal loopholes

 The Moon Jae-in administration has proposed a rule aimed at limiting the debt-to-GDP ratio to 60 percent and the consolidated budget balance below 3 percent. The rule would mandate the government devise measures to solidify fiscal integrity through efficient spending and increased revenues. That’s a means to ensure the government’s fiscal health and national competitiveness.

Such fiscal guidelines have been pushed by the National Assembly since 2016, but without any sincere discussion. In the meantime, Korea’s national debt has snowballed due to the liberal administration’s spending on populist welfare programs amid an economic slowdown from the Covid-19 outbreak. Our national debt has exceeded 100 trillion won ($86.1 billion) this year alone after the government drew up four supplementary budgets. As a result, the country’s debt-to-GDP ratio is expected to increase to nearly 44 percent this year. For years, a 40 percent ceiling was considered a gold standard for fiscal integrity.

The Moon administration has been reluctant to introduce fiscal guidelines citing various reasons, including the need for fiscal stimuli in the battle against Covid-19. We welcome the government’s decision, albeit belated, to adopt guidelines.

But the problem is that the fiscal rule can be stretched when the need arises. We wonder if the government really can stick with the guidelines. For instance, they allowed the Finance Ministry to draw up next year’s budget without having to meet the requirements for the debt-to-GDP ratio and the fiscal deficit at the same time. In other words, even if one of the two requirements is not met, it is OK as the government can compromise with the other requirement.

Moreover, the guidelines cannot be applied during times of war, natural disaster and economic crisis. When the economy slows down, the government can ease the standards. The guidelines also allow the government to change them without intervention from the legislature.

A study by the National Assembly Strategy and Finance Committee shows that 159 countries around the world have fiscal guidelines. 103 of them implement them by law, while 14 execute them by constitution to ensure binding force. For example, Germany has managed to keep its fiscal debt-to-GDP ratio under 35 percent since 2009 because it’s mandatory. No wonder Germany is a frontrunner in fighting a prolonged battle against Covid-19 thanks to its strong fiscal balance.

The Moon administration will be tempted to spend more than ever in the face of the pandemic. The fiscal guidelines will surely help the government build a responsible and sustainable country instead of resorting to populist policies. But we wonder if its lax fiscal guidelines really can work. The government and the legislature must toughen the guidelines.
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