Transcript consolidated central government

Current Fiscal Policy and
Expenditure Management in Korea
October 9, 2003
Hong-Sang Jung
Ministry of Planning and Budget
Republic of Korea
Table of Contents
Ⅰ. Main Features in Fiscal Policy ……………………………… 3
Ⅱ. Role in economic development …………………………….. 17
Ⅲ. Policies during the crisis period ……………………………. 22
Ⅳ . Future Challenges ………………………………………….. 26
2
Ⅰ. Main Features in Fiscal Policy
 Fiscal Balance (consolidated central government)
6
Percent of GDP
4
Consolidated central government balance
2
0
-2
-4
-6
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
03
3
 Since Early 80s, fiscal balance has been managed relatively well
except the crisis period (’97~’99)
 Note structural factors : (i) surplus in social security (about 3
percent of GDP in 2002); (ii) privatization proceeds (about
0.2~1.1 percent of GDP a year in ’98~’03)
4
 National debt
45
+ Local government debt
40
Central government debt
+ Government guaranteed debt
Percent of GDP
35
30
25
20
15
Central government debt
10
5
0
연도
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
5
02
 National debt amounts to about 22 percent of GDP in 2002.
However, this figure increases to about 40 percent if the government
guaranteed debt are included
 The government guaranteed debt increased sharply just after the
economic crisis. The guaranteed debt were used for financial sector
restructuring.
6
 Two turning points (1) : early 80s
 Fiscal tightening started. Prudent fiscal management (the principle
of expenditure within revenue) continued until the economic crisis.
 Helped stabilizing the economy.
 However, resulted in a shortage of infrastructure and high
transportation costs in late 80s. As a response, infrastructure
investment increased in late 80s and early 90s, resulting in slight
deficits in that period.
7
 Two turning points (2): late 90s (economic crisis)
 Fiscal loosening and deficits in ’97~’99 to help the recovery from
the economic crisis. Fiscal surplus again after this period.
 Expenditure increase first and revenue increase followed.
Expenditures to support recovery  economic recovery  revenue
increase/ fiscal surplus.
8
 Size of total expenditure and net lending
30.0%
Total expenditure and net lending
25.0%
Percent of GDP
20.0%
15.0%
Total revenue
10.0%
5.0%
Consolidated central government balance
0.0%
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
-5.0%
-10.0%
9
 Relatively small size of government (Korea 22.8 percent of GDP
in 2002; OECD average 37.3 in 2001).
 Size of total expenditure followed fluctuations in that of total
revenue. As a result, fiscal balance has remained almost balanced.
10
 Composition of revenue
100%
etc
80%
consumption tax &
customs
60%
property tax
40%
income & payroll
tax, social security
contribution
20%
0%
Korea
OECD total
11
 Heavily dependent on consumption and property taxes rather than
income taxes.
 Privatization proceeds amounted to 0.2 ~ 1.1 percent of GDP a year
in ’98 ~ ’03.
12
 Composition of expenditure (by function)
100%
Economic affairs
80%
Social protection
60%
Health
Education
40%
Public order and
safety
General public
services
Defence
20%
0%
Korea
OECD average
13
By function :
 Relatively low : social protection, health
 Relatively high : economic affairs, defense.
14
 Composition of expenditure (by economic classification)
100%
Net Capital Outlays
80%
Consumption
60%
Interest payment
40%
Subsidies
20%
Income transfer
0%
Korea
OECD average
15
By economic classification :
 Relatively low : income transfer, government consumption,
interest payment.
 Relatively high : Public investment.
16
Ⅱ. Role in economic development
 Role in economic development : fiscal vs. financial
30
Total expenditure and net lending
25
Percent of GDP
20
15
10
M3
5
0
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
00
01
02
17
 Financial sector played more active role than the fiscal sector in
economic development.
 During the economic crisis, fiscal sector played an active role
because the financial sector could not perform its role properly.
18
 Main contributions by the fiscal sector
 Helped maintain macroeconomic stabilization. Fiscal
conservatism and resulting low public debt No excess supply of
liquidity by the fiscal sector
 Supplied infrastructure for economic development (road and harbor
construction, vocational education, etc.). and initiated structural
changes (government loans to new technology SMEs, R&D
institutions, etc.).
19
 Features for effectiveness
 Fiscal policies were implicitly linked to economic plans. Plans had
a medium-term (5 years) perspective (until 96s).
 Concentrated on high priority areas (esp. economic affairs). Given
limited resources, concentration was essential. Strong political
leadership and good inter-ministrial cooperation supported this.
20
 Improvement in fiscal management system
 Improve rationality : Review committee system for budget
compilation.
 Flexible apparatus to support important projects(infrastructure
construction, housing) : public enterprises, special accounts for
earmarked revenues, and extra-budgetary funds. Efforts to improve
their efficiency (e.g., appraising system for public enterprises and
funds, and auditing).
 Efforts to save cost : Preliminary feasibility studies, tightening of
project ceiling.
21
Ⅲ. Policies during the crisis period (’97~’99)
 Fiscal policies to help the recovery
 Supporting the restructuring costs of the financial sector.
 Extending social safety net.
 Boosting economic growth.
22
 Restructuring the financial sector
 KAMCO and KDIC issued bonds (total 97 trillion won) to clean
non-performing loans and to add capital to a required level.
Banks and other financial institutions could remain credible and
functioning because of this restructuring.
 Rule of thumb for cost sharing: a half by the financial institutions
and the other half by the government.
 The government is repaying bonds since 2003 (2 trillion a year in
coming 25 years).
 In addition, the government took the burden of interest costs.
23
 Extennding social safety net
 Unemployment became an important issue.
Unemployment rate
’96
’97
’98
’99
’00
’01
‘02
2.0
2.6
6.8
7.5
6.8
6.2
5.5
 The government increased public works, vocational training,
income transfer to low-income earners, unemployment insurance,
and loans to unemployed.
24
 Supporting economic growth
 Increased credit guarantees and government loans to,especially
SMEs (small and medium enterprises).
 Increased infrastructure constructions as a stimulus to recovery.
25
Ⅳ. Future challenges
 Changes in policy environment
 Spending pressure will accelerate : health and welfare costs due to
an aging population; costs due to maturing social safety net;
uncertain cost of cooperation with North Korea.
 Diversified demand and political pressure. Complicated policy
demands.
26
 The government plans to
 Clearly implement medium-term plans.
 Improve budget formulation procedure with a top-down approach.
 Strengthen performance management.
 Improve transparency by simplifying budget structure.
27