Publications Global KLRI, Best Research, Better Legislation


Research Report

Legal Concept and Standards of Fiscal Soundness
  • Issue Date 2020-07-10
  • Page 166
  • Price 8,000
Preview Download
The purpose of this study is to conceptualize fiscal soundness in legal context and establish its standards. The definition of fiscal soundness is that the economic condition is intact and durable. Although fiscal soundness is the most frequently used concept in determining a state's budget and fiscal policy, it lacks a clear definition, and there has been a confusion and social controversy. By reviewing legislative history, we find out that fiscal soundness has been a standard that the state has applied to the financial management of local governments, but since 1989, it has been legally applied to national finances, especially since the IMF economic crisis and the 2008 financial crisis.
National Finance Act, which can be called the basic law of national finance stipulates the Improvement of fiscal soundness in Chapter 5. It consists of enactment of and amendment to statutes entailing treasury burden, restrictions on rebates or reduction of national taxes, restriction at the formulation of supplementary revised budget bills, appropriation of surplus in tax accounts, management of state obligations, and bearing and management of state guarantee obligations. In particular, the improvement of fiscal soundness bill submitted to the National Assembly as a government legislation in 2016 is significant in that it legally defined the concept of 'fiscal soundness' and presented the ratio of the national debt to GDP, and the ratio of the fiscal balance deficit as indicators of fiscal soundness. The bill stipulated that for national debt, the ratio of the national debt divided by the gross domestic product was defined as the national debt ratio, and that the figure should be maintained at 45/100 or less. As for the fiscal balance, it stipulated that the deficit of the managed fiscal balance should be maintained at less than 3/100 of the gross domestic product. The bill is important because it is the first attempt to define a criteria of fiscal soundness.
In order to determine the validity of these standards, this study examined the fiscal soundness standards of major international organizations such as the International Monetary Fund (IMF), the Organization for Economic Cooperation and Development (OECD), and the European Union (EU). As a result of this study, we find that general and clear indicators of fiscal soundness do not exist even for major international organizations. However, many international organizations generally present the so-called 60%/3% rule as a criteria for fiscal soundness, and this standard was found to be commonly adopted by major Western countries. That is, the national debt must not exceed 60% of gross domestic product, and the fiscal deficit must not exceed 3% of gross domestic product.
In consideration of the legislative history of Korea and the standards of major international organizations, this study came to the conclusion that it is reasonable to adopt both the national debt ratio standard and the financial deficit standard as criteria for determining fiscal soundness. Considering the role and function of national finance, it is considered that the concept of soundness of national finance needs to be understood more broadly than that of local finance.
In the conceptualization of fiscal soundness, considering the sustainability of fiscal, the concept can be defined as meaning that the fiscal activity of the state or its results are within the range of capacity that the state can bear in the long term.
It is appropriate to use standards such as the ratio of the national debt to GDP, the ratio of the fiscal balance deficit, and the ratio of debt to total assets as a criterion for judging such fiscal soundness.