Reforming fiscal scope will improve the state debt statistics

As the International Monetary Fund clarified the fiscal scope in 2001, President Roh Moo-hyun`s government launched an overhaul to the fiscal accounting system. But the initiative hit a snag after the controversy over a small government versus a big government emerged, making the issue of fiscal scope very sensitive. Many have since questioned about the fiscal scope and statistics but the government repeatedly said that they followed international rules in calculating sovereign debt.

President Lee Myung-bak did not consider the issue deeply enough when he took office, like his predecessor Roh Moo-hyun. But lawmakers both from the ruling and opposition parties and experts have constantly raised the issue, forcing the government to decide to change the accounting rules in the first half of 2009. The draft of the reform will be released in late January of 2011. The change will become a historic move to bring the country`s fiscal statistics to a higher level.

The reform will turn debt debate into a practical one

The public sector consists of the government and state companies. The fiscal scope is confined to the government, in principle. The government refers to the agencies that make and implement policies while state companies are engaged in business activity. Therefore, the core of the upcoming reform is how to clearly divide the public sector into the government and state companies. Those who do business within the government agencies should be categorized as peudo-state companies while the activities involving government policies by a state firm should be counted as peudo government spending and reflected in the state expenditure accordingly. The draft may spark another controversy but it will help turn the superficial and endless debate over the state debt into a practical and productive one.

Importance of balance and check, opposition party`s roles, and bureaucrats` political neutrality

The controversy over sovereign debt that has dragged over the past decade has produced significant implication and lessons not only for the fiscal scope but also the overall policy management. Political parties drastically switched their positions on the issue, depending on their changing situations. When they took the power, they were reluctant to the reform. But when they lost election, then they turned more aggressive. This is their true nature as politicians should always keep in mind elections and political strife. Politicians from the ruling party in any country tend to ignore fiscal deficit and a rise in state debt with few exceptions. It should be reminded that the upcoming change in accounting rules has been done by sound public opinion at home, not by external pressures such as international organizations. This reform provides a chance to realize the importance of roles by the balance and check system under the presidential system and opposition parties. 

Another lesson is the significance of bureaucrats` political neutrality. The conceptual problem over national debt and fiscal scope was clearly revealed many years ago but bureaucrats failed to stand up against the opportunistic politicians. If they stayed away from politics with firm will, the unproductive controversy over the state debt issue would have ended much earlier.

By Ok Dong-suk, professor at University of Incheon