Trends and Policy Implications of Fiscal Rules Operations in the Major Countries
Fiscal rules refer to the specific and legally binding fiscal managing goals for the relevant indexes in gross figures such as government debt, and they are means of fiscal policy adopted by individual countries to ensure fiscal discipline. Fiscal rules are many types, for example, revenue rules (Netherlands), expenditure rules (Sweden and the U.S.), fiscal balance rules (Switzerland), and debt rules (Germany and the U.K.), etc. Korea has revenue rules stipulated in the regulations of the National Fiscal Act on how to appropriate annual expenditure surpluses etc. and has implicit expenditure rules reflected in “the National Fiscal Management Plan,” under which the government controls the expenditure growth rate. However, the latter are internal guidelines with weak legal restriction.
The introduction of fiscal rules is believed to be urgent considering the fact that Korea’s fiscal soundness can deteriorate in the future and that fiscal sustainability must be ensured. The government’s execution of welfare-related public promises, the economic recession, and tax revenue deficits due to its optimistic economic forecasts led to KRW 46.2 trillion of deficits in the Fiscal Balance Subject to Management in the first half of 2013. In addition, a deficit of KRW 27.6 trillion is likely by 2016, unlike the government’s prediction of a surplus (NABO forecast). Moreover, Korea’s total government debt is expected to rise to 218.6% of GDP by 2060 from 34% of GDP in 2012, taking into account the growing welfare expenditures amid the low birth rate and aging population and dwindling tax revenues amid the shrinking economically active population, etc. (NABO forecast).
An empirical analysis of the influence of fiscal rules on fiscal soundness based on the data from 27 EU members found that an incremental increase of 1 on the fiscal rules index in these countries led to a growth of 0.33% and 0.68% in short- and mid-term fiscal surplus to GDP, respectively. This shows that fiscal rules are significant and efficient means in this regard.
Therefore, in introducing new forms of fiscal rules, the government needs to adopt such rules that can both ensure fiscal soundness and allow consistent responses to economic conditions and to legislate these rules in order to increase their legal binding. Like the U.K. and Sweden, which have articulated fiscal rules in their relevant laws, Korea needs to consider stipulating fiscal balance or fiscal rules including specified debt ratios or expenditure controls in the relevant laws such as the National Fiscal Act. In addition, to allow the fiscal policy to respond to changing economic conditions, the government needs to contemplate changing the mid-term fiscal operation target from the present fiscal balance to the structural fiscal balance, which excludes automatic increases/decreases in revenues and expenditures causing by economic fluctuations.
The introduction of fiscal rules is believed to be urgent considering the fact that Korea’s fiscal soundness can deteriorate in the future and that fiscal sustainability must be ensured. The government’s execution of welfare-related public promises, the economic recession, and tax revenue deficits due to its optimistic economic forecasts led to KRW 46.2 trillion of deficits in the Fiscal Balance Subject to Management in the first half of 2013. In addition, a deficit of KRW 27.6 trillion is likely by 2016, unlike the government’s prediction of a surplus (NABO forecast). Moreover, Korea’s total government debt is expected to rise to 218.6% of GDP by 2060 from 34% of GDP in 2012, taking into account the growing welfare expenditures amid the low birth rate and aging population and dwindling tax revenues amid the shrinking economically active population, etc. (NABO forecast).
An empirical analysis of the influence of fiscal rules on fiscal soundness based on the data from 27 EU members found that an incremental increase of 1 on the fiscal rules index in these countries led to a growth of 0.33% and 0.68% in short- and mid-term fiscal surplus to GDP, respectively. This shows that fiscal rules are significant and efficient means in this regard.
Therefore, in introducing new forms of fiscal rules, the government needs to adopt such rules that can both ensure fiscal soundness and allow consistent responses to economic conditions and to legislate these rules in order to increase their legal binding. Like the U.K. and Sweden, which have articulated fiscal rules in their relevant laws, Korea needs to consider stipulating fiscal balance or fiscal rules including specified debt ratios or expenditure controls in the relevant laws such as the National Fiscal Act. In addition, to allow the fiscal policy to respond to changing economic conditions, the government needs to contemplate changing the mid-term fiscal operation target from the present fiscal balance to the structural fiscal balance, which excludes automatic increases/decreases in revenues and expenditures causing by economic fluctuations.