Time for binding fiscal guidelines

The government is ending excess fiscal expansion to help strengthen the fiscal integrity of the country. President Yoon Suk-yeol is expected to chair a national fiscal strategy meeting this week to declare a dramatic shift to budgetary tightening. Our fiscal soundness has rapidly deteriorated due to the sharp increase in national liabilities from overspending by the liberal Moon Jae-in administration over the past five years. Constraint after a reckless spending spree under the previous government is the right direction for the new conservative government.

Per capita debt has exceeded a whopping 20 million won ($15,400). When counting the supplementary budget increase so far this year, our national liabilities are expected to reach 1,069 trillion won. Debt has snowballed by more than 400 trillion won over the last five years. Fiscal expansion was inevitable for the government to fight Covid-19. But populist spending under political design worsened the health of our public finance. A tax-financed increase in public-sector jobs was an exemplary case. Populist spending can add to inflationary pressure and harden people’s lives. Fiscal expansion was also out of sync with monetary tightening by the Bank of Korea which lifted the benchmark rate from August last year.

Public finance has been wrecked as a result. After the first supplementary budget earlier this year, the national liability-to-GDP ratio exceeded 50 percent, far past the long-held 40 percent Maginot Line. The International Monetary Fund expected Korea’s debt-to-GDP ratio to hit 67 percent by 2026. Some could claim that the ratio is passable compared to other developed nations. But Korea is a society aging at the world’s fastest rate. Welfare cost could become colossal. The burden will land on future generations if fiscal health is not strong.

Legally-binding fiscal guidelines should be set rapidly. A revision of the Fiscal Act aimed at adopting guidelines for public finance management has been submitted to the National Assembly. The revised bill is intended to cap debt increase, but it was found to have too many loopholes. The implementation also was delayed to 2025 and legislative review has been slow. According to the IMF, 106 governments have been enforcing their fiscal guidelines. During his campaign, Yoon vowed to reform public finance management. The guidelines should be more effective and enforced as early as possible.

Re-strengthening fiscal strength after loose management during the pandemic is a task requiring bipartisanship for national sustainability. If taxes cannot be hiked, expenditures should be streamlined. Politicians must stop demanding pork-barrel projects for their constituencies at the expense of public finance. Limited resources must be saved to be put to use only for necessary areas.