Fiscal deficit must not exceed 3% of GDP by law in S. Korea

2022.09.13 14:52:52 | 2022.09.13 16:08:08

Finance Minister Choo Kyung-ho. [Photo by Yonhap]이미지 확대

Finance Minister Choo Kyung-ho. [Photo by Yonhap]

The South Korean government would fall under a legally-binding mandate to manage the fiscal deficit under 3 percent of the gross domestic product as it endeavors to restore public finance after unprecedented spending during Covid-19 period.

The government approved the guidelines on fiscal management which would be immediately effective upon passage of the related bill.

It must ensure the deficit-to-GDP ratio does not exceed 3 percent in order to avoid breaking the law.

If the national debt exceeds 60 percent versus GDP, the deficit ratio must be maintained at below 2 percent.

An exception can only take place in times of crisis like war or economic recession.

Fiscal balance refers to the difference between a government’s revenue (tax collection) and its expenditures. It is managed in two levels - consolidated balance and managed balance. The managed fiscal balance factors in expenses for the country’s four main social security funds.

Korea’s managed fiscal balance is projected to deliver a deficit ratio of 5.1 percent against GDP at the end of this year, worse than 3.3 percent consolidated deficit-to-GDP ratio.

The government is seeking to begin applying the new rule from the 2024 budget without any grace period. The previous government had proposed a three-year grace period when it first proposed the fiscal management rule in October 2020.

Debt repayment would be the top priority if public finance generates a surplus. Half of the surplus must go to repaying debts, compared with the current 30 percent.

The government will review the fiscal management rule for revisions every five years.

By Cho Jeehyun

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