South Korea is seeking to restore its reputation for fiscal soundness once pandemic spending is over by imposing a legal cap on public debt.
The government plans to limit debt at 60% of gross domestic product and its fiscal deficit at 3% from 2025, according to planned finance ministry fiscal rules released Monday. The plan needs to be approved by parliament.
While the new rules still look strict compared with the debt levels of some other developed economies, especially Japan’s, they represent a loosening from a long-time goal of keeping debt at 40% of GDP.
The rules aim to ensure the sustainability of public spending and prepare against mid-to-long term risks, the ministry said. At least one of the two new criteria needs to be met, and measures to recover fiscal health must be put together if the limits are breached, the statement said.
Fiscal policy will continue to fulfill its role as the “last bastion” of support for the economy, but at the same time, the government wants to ensure future generations inherit a strong fiscal balance, Finance Minister Hong Nam-ki said in a statement.
South Korea’s policy makers have long sought to keep a tight rein on debt, citing an aging population and potential reunification costs with North Korea. The government shed its frugal stance once the pandemic struck, pushing ahead with four extra budgets that included a universal cash handout.
The country’s debt ratio is expected to rise to 43.9% this year from 37.7% in 2019, and hit 58.3% by 2024, according to next year’s budget proposal. Some policy makers worry that the pace of debt increase could risk the country’s credit rating. Moody’s Investors Service has a rating of Aa2 for South Korea.
Under the plan, the new limits can be temporarily relaxed in times of crisis and will be reviewed every five years.
(Updates with chart and finance minister comments.)