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Research Report

The Study on the act regarding the national debt and the fiscal balance
  • Issue Date 2020-12-16
  • Page 198
  • Price 8,000
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Ⅰ. Backgrounds and Purposes
▶ Increasing demands for a response to the Corona crisis and worsening social polarization.
○ The role of the public finance has been expanded to cope with the economic crisis, and the national debt has increased significantly in the process of injecting huge amounts of money. 
- U.S. national debt exceeded GDP for the first time in 70 years after World War II.
- Germany succeeded in reducing its GDP by 60% under the Basic Law, but it increased sharply to 72% of GDP according to the 2021 budget. 
○ “New Normal” phenomenon appears in which the net interest burden is reduced even if the national debt increases due to the lowest interest rate ever, and low prices are less likely to cause inflation.
- Korea's national debt ratio is considered to be healthy among the OECD countries, raising the need for more expansionary fiscal policy management (recommended by IMF).
- Nevertheless, Korea, which belongs to the emerging economies group, must manage its credit rating well to prepare for the financial crisis, and it is necessary to manage the ratio of national debt to GDP at an appropriate level. 
○ Need to make systematic efforts to manage national debt and fiscal balance at an appropriate level.
- Due to the nature of the fiscal law, it is important to establish and implement fiscal policies suitable for our financial conditions, and the role of the government and parliament should be comprehensively analyzed.
- It is necessary to consider the adoption of fiscal rules for managing national debt and fiscal balance and how to utilize numerical target limits for its successful operation.
Ⅱ. Major Content 
▶ The significance and function of national debt and fiscal balance
○ Comprehensive scope of national debt, its calculation method, and need to distinguish between national debt and liabilities.
- Relationship between national debt standards in compliance with international standards comparing the national liabilities according to the accrual basis accounting.
- It is necessary to review the scope of the national debt management plan and come up with measures to reasonably manage and supervise the public sector debt, contingent liabilities, etc. 
○ The meaning and type of the fiscal balance
- Analyse the meaning and examples of the “consolidated fiscal balance” and the “consolidated fiscal balance excluding social security funds” used in Korea.
- Examine the various types and methods of calculating the fiscal balance according to international standards such as government finance statistics (GFSM) and review the feasibility of other alternatives (such as the primary balance and structural balance) considering the recent changes in the economic environment. 
○ Review the meaning and effectiveness of the fiscal rules that manage the numerical limits on the national debt and fiscal balance.
- Review the main issues and effectiveness of various fiscal rules, including revenue rules, expenditure rules, debt rules, and budget balance rules etc.
- Explore factors that should be considered together when adopting fiscal rules in Korea and the governance system to ensure their effectiveness.
▶ Current law's discipline on the national debt and the fiscal balance 
○ Analyse the Article 58 of the Constitution, the Articles 7, 9, and 91 of the 『National Finance Act』 to identify problems in the process of reporting national debt and consolidated fiscal balance and submitting it to the National Assembly. 
- Insufficient binding force of the consolidated fiscal balance forecast included in the National Fiscal Management Plan.
- A weak connection between budget and financial statement due to the difference between the 'consolidated fiscal balance' included in the National Fiscal Management Plan (NFMP) and the 'consolidated fiscal balance table' attached to the national financial statement.
- Continuous questions about the scope of the National Debt Management Plan and the conceptual gap between the Article 91 of the National Finance Act and the announced national debt (D1, D2, D3), etc.
▶ Major issues and evaluation of the "Korean fiscal rule" 
○ According to the revision of the 『National Finance Act』, the proposition of which was pre-announced on November 30, 2020, details are delegated to the enforcement ordinance with only legal grounds for the fiscal rules.
- Anticipates problems such as the form of discipline (law and enforcement ordinance), the basis of fiscal balance standards (integrated fiscal balance), national debt standards (interim zones of D1 and D2), the rationality of calculation (complementary multiplication of national debt and fiscal balance with the ratio of GDP), concerns over the regularization of exemption from the broad application of its exceptions, the effectiveness of measures for the fiscal soundness, and the absence of an independent fiscal council to monitor the implementation(compliance) of fiscal rules.
○ Searching for a rational operation plan of the Korean fiscal rule
- Appropriate forms of regulation (comprehensive review with Articles 54 and 57 of the Constitution) to secure normative power of fiscal rules.
- It is necessary to utilize the consolidated fiscal balance that meets international standards such as GFSM or to find ways to utilize a third alternative (primary balance, structural balance).
- Establishing a means to secure the effectiveness of fiscal rules and mechanisms to assure its implementation (independent governance)
- "Re-structure the relationship between the government and the parliament" for checks and balances of their fiscal authorities and rationalize the functions and procedures of the National Assembly's budget review (comprehensive measures to regulate the total amount of finances). 
Ⅲ. Expected Effects
▶ Necessity and timeliness of adopting the fiscal rules
○ The role and significance of the public finance is expanding due to the external financial conditions and changes in the economic environment, and this trend is expected to continue for some time.
- As the role of the public finance increases, it is necessary to prepare reasonable deliberation, supervision and check functions of the National Assembly and the government, and to analyze and review them at the constitutional level.
- If the budget process focuses on how the government's right to draw up a budget, the National Assembly's right to review and settle the budget, and the government's right to agree to increase the amount of budget, it is necessary to prepare a policy device to carefully adjust and check the authority and responsibility structure.
- Instead of just stipulating the fiscal rule as numerical limits (targets), such as the national debt-to-GDP ratio and the fiscal balance-to-GDP (fiscal deficit) limit, it is necessary to rationally improve the fiscal authority and functions between the government and parliament.
○ In order for the National Assembly and the government to perform their roles to operate the responsibly and ensure the effectiveness of fiscal rules based on the objective and accurate explanations of the national debt and fiscal balance, independent fiscal council with expertise might be required.
- Looking for the new possibilities to expand and strengthen the public's interest and participation in the practical achievements and limitations of various policies and programs funded by the public finance.