Fiscal Soundness—The Problem Is the Pace of Increase; Tax Hikes Require Public Consent

As the weather turns cold, the National Assembly enters budget season. I would like to revisit the concept of fiscal soundness. Of course, it is also clearly stated in the law.

According to Article 1 of the National Finance Act, “The purpose of this Act is to establish matters concerning national finance, including the budget, funds, settlement of accounts, performance management, and national debt, in order to build the foundation for efficient, performance-oriented, and transparent fiscal management and sound public finance, and to enhance the public nature of fiscal operations.” In other words, arguments that there is no need to maintain sound public finance, or that it can simply be ignored, should not be accepted.

Then what is the appropriate level of fiscal soundness, a concept characterized by ambiguity? By global standards, a national debt-to-GDP ratio of around 60–80% is generally proposed. Meanwhile, countries with semi-key currency or key currency status surpassed 100% long ago.

However, I believe that an “appropriate level” differs from country to country, and that there is no uniform yardstick. Various factors must be considered, such as foreign exchange and gold reserves, exchange rates, and economic fundamentals.

National debt and household debt differ in nature, but they are the same in that both involve borrowing money and paying interest against future finances. Claims such as “government debt does not need to be repaid” or “the people do not repay it” are false.

Korea’s public finances are indeed relatively sound. As of 2024, the national debt-to-GDP ratio stands at 46.1%, which by global standards and ordinary fiscal common sense can be regarded as sound fiscal management.

However, the pace of increase is the problem. It slowed temporarily under the Yoon Suk Yeol administration, but the stance of expansionary fiscal policy has been maintained for nearly the past decade. The national debt-to-GDP ratio was 34% in 2015, but rose to 46% in 2024, an increase of 12 percentage points over nine years.

During COVID, scholars of Modern Monetary Theory (MMT) argued that printing large amounts of money would not affect prices. But the money released during COVID ultimately left both the United States and Korea suffering from high inflation. In particular, soaring housing prices and jeonse and monthly rents have deepened the hardship of ordinary people. In other words, the conclusion is that Modern Monetary Theory was wrong. We are repeatedly learning that the cash-like fiscal support and spending used today return as pain in the future.

Personally, I believe a national debt-to-GDP ratio of up to 50% is acceptable. But the real problem is that national debt is not only extremely difficult to reduce, but continues to rise gradually. It is the same logic as households or individuals being unable to cut back once their spending habits have increased. In particular, once a government increases rigid expenditures, it is nearly impossible to reduce them, and it is only natural that such spending rises along with inflation.

Accounting consists of revenue and expenditure. It is sound to spend only as much as has been collected in revenue. While the government finds immediate tax increases difficult, it wants to produce greater results, and so it issues deficit-financing government bonds to spend more than it collects. Although this goes through the consent procedure of the National Assembly, it is also true that government bonds are frequently issued through supplementary budgets, where oversight is weaker than during the regular budget session of the National Assembly.

Therefore, fiscal soundness must be managed not only for legal reasons but also from the standpoint of public economics and fiscal administration. If it cannot be reduced, then at least the pace of increase must be slowed. Expenditures should be planned in consideration of revenues, and the government bond ratio should be managed in the low-50% range. If necessary, taxes should be raised, but public consent must first be obtained.

Gwang yong Go

Policy Director, Center for Free Enterprise (CFE)

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Original title: 재정건전성--증가속도가 문제, 증세 때 국민동의 구해야

Author: Gwang yong Go

Date: 2025-11-26

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=press&idx=28279