1. Current Fiscal Policy and Expenditure Management in Korea
October 9, 2003
Hong-Sang Jung
Ministry of Planning and Budget
Republic of Korea

2. 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

3. Ⅰ. Main Features in Fiscal Policy
Fiscal Balance (consolidated central government)
Percent of GDP
Consolidated central government balance

4. . Since Early 80s, fiscal balance has been managed relatively well
 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 ~1.1 percent of GDP a year in ’98~’03)

5.  National debt + Local government debt Central government debt
+ Government guaranteed debt
Percent of GDP
Central government debt

6. . National debt amounts to about 22 percent of GDP in 2002
 National debt amounts to about 22 percent of GDP in 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.

7. 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.

8. 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.

9. Size of total expenditure and net lending
Percent of GDP
Total revenue
Consolidated central government balance

10. . Relatively small size of government (Korea 22. 8 percent of GDP
 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.

11. Composition of revenue

12. . Heavily dependent on consumption and property taxes rather than
 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.

13. Composition of expenditure (by function)

14. By function :
 Relatively low : social protection, health
 Relatively high : economic affairs, defense.

15. Composition of expenditure (by economic classification)

16. By economic classification :
 Relatively low : income transfer, government consumption, interest payment.
 Relatively high : Public investment.

17. Total expenditure and net lending
Ⅱ. Role in economic development
Role in economic development : fiscal vs. financial
Total expenditure and net lending
Percent of GDP M3

18. . Financial sector played more active role than the fiscal sector in
 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.

19. 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.).

20. 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.

21. 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.

22. 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.

23. 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.

24. Extennding social safety net · Unemployment became an important issue.
’96 ’ ’ ’99 ’ ’ ‘02
Unemployment rate
· The government increased public works, vocational training, income transfer to low-income earners, unemployment insurance, and loans to unemployed.

25. Supporting economic growth
· Increased credit guarantees and government loans to,especially SMEs (small and medium enterprises).
· Increased infrastructure constructions as a stimulus to recovery.

26. 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.

27. 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.