Fiscal Consolidation and Budget Reform in Korea

The Role of the National Assembly

by Kun-Oh Kim

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Research Questions

  1. What are the reasons behind Korea's budgetary difficulties?
  2. How can the Korean National Assembly establish fiscal rules and budget enforcement procedures that will achieve mid- to long-term fiscal consolidation while also retaining the ability to employ countercyclical fiscal policies in times of fiscal crisis?

Korea's fiscal responses to the financial crises of 1997–1998 and 2007–2010 led to a rapid accumulation of budget deficits and national debt. The Korean government needs to take preemptive measures to retain room for countercyclical policies. Korea's export-dependent economy is vulnerable to external shocks and Korea's rapidly aging population and declining fertility rate are imposing additional budgetary pressures on the government. Thus, restoring fiscal soundness to the Korean economic system is an urgent priority for Korean policymakers. The author presents a plan for fiscal consolidation and budget reform in which the Korean National Assembly (NA) would establish a new budget process, centered on a fiscally constrained budget resolution that would be scheduled for adoption prior to consideration of revenue or spending bills. Budget enforcement procedures similar to those employed by the U.S. Congress could be applied to Korea if tailored to the NA's unique constitutional constraints and budgetary processes.

Key Findings

Korea's Economy Remains Vulnerable to External Shocks, and Future Shocks Will Likely Impose a Further Fiscal Burden

  • The size of the national debt has increased dramatically.
  • Korea's debt-to-GDP ratio continues to rise.
  • Budgetary pressures imposed by Korea's rapidly aging population and declining fertility rates underscore the urgency of a medium-term consolidation framework.

A Strong Political Consensus for Fiscal Consolidation Is Needed for Meaningful Budget Reform

  • The Korean government should take preemptive measures to retain room for countercyclical policies.
  • Success will depend on the willingness of the legislature to act to restore a balanced budget and achieve fiscal consolidation.

Recommendations

  • The National Assembly (NA) should enact legislation to establish a new parliamentary budget process centered on a fiscally constrained budget resolution that would be scheduled for adoption prior to consideration of revenue or spending bills.
  • This legislation should be buttressed by a combination of legislative tools to enhance Korea's capacity to enforce budget constraints.
  • Budget enforcement procedures similar to those employed by the U.S. Congress could be applied to Korea if tailored to the NA's unique constitutional constraints and budgetary processes.

Table of Contents

  • Chapter One

    Introduction

  • Chapter Two

    The Budget Deficit and National Debt of South Korea

  • Chapter Three

    The Budget Process and the Budgetary Power of the National Assembly

  • Chapter Four

    Budget Reform Proposals for Fiscal Consolidation in the National Assembly

  • Chapter Five

    Conclusions and Policy Recommendations

The research described in this report was conducted within the RAND Center for Asia Pacific Policy (CAPP) under the auspices of the International Programs of the RAND Corporation.

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