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Korea

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International Monetary Fund
Published Date:
January 1996
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I. Fiscal Policy: An Overview 1/

1. Introduction

Fiscal policy in Korea since 1982 has been guided by the medium-term objectives set out in the rolling Five-Year Plan for Fiscal Management. 2/ The size and composition of expenditure and revenue has generally been geared toward the attainment of these medium-term objectives, and short-run demand management has typically played a relatively minor role. Thus, annual budget plans have mainly reflected the priorities of the medium-term fiscal plans.

The purpose of this chapter is to provide a broad overview of the structure and characteristics of public finance in Korea, and to discuss fiscal policy in recent years against the background of the medium-term objectives. The analysis shows that despite constraints imposed by the institutional framework, the Government has managed to maintain tight budgetary control. Much of this accomplishment rests with the fact that the overriding principle of fiscal policy has been that expenditure objectives remain within the limits of revenue.

The remainder of the chapter is organized as follows. Section 2 presents a brief description of the structure of the nonfinancial public sector. Section 3 analyzes trends in the size and composition of central government expenditure, revenue, financing, and debt, against the background of the medium-term objectives of fiscal policy. Section 4 evaluates the stance of fiscal policy on the basis of summary indicators. Finally, the last section provides some concluding remarks.

2. Structure of the nonfinancial public sector

The nonfinancial public sector in Korea covers the consolidated central government, local governments, and nonfinancial public enterprises (Table I.1 presents a simplified diagram of the organization of the Korean nonfinancial public sector).

Table I.1.Korea: Structure of the Nonfinancial Public Sector, 1995 1/
Nonfinancial Public Sector
Consolidated Central GovernmentLocal GovernmentsPublic Enterprises
Central GovernmentPublic Enterprises
General AccountSpecial AccountsSpecial Budgetary FundsSpecial AccountsGeneral AccountSpecial AccountsPublic Enterprise Special AccountsGovernment-invested enterprises
(1)(19)(31)(4)(1)Government-funded enterprises
Subsidiaries of government-invested enterprises
Sources: Economic Planning Board, 1993Budget in Brief; and Ministry of Finance and Economy, The FY 1995 Korean Budget in Brief.

Figures in brackets indicate the number of accounts and funds. For local governments, the number of special accounts varies by locality.

Sources: Economic Planning Board, 1993Budget in Brief; and Ministry of Finance and Economy, The FY 1995 Korean Budget in Brief.

Figures in brackets indicate the number of accounts and funds. For local governments, the number of special accounts varies by locality.

a. Consolidated central government

The consolidated central government comprises the central government (general account, 19 special accounts, and 31 special budgetary funds) and four public enterprise special accounts. 1/ With the exception of the special budgetary funds, the general and special accounts comprise the consolidated central government budget which is submitted to the National Assembly for deliberation and approval.

The general account is the basic account of the central government and directly reflects government policies. It includes major government expenditures, such as defense, education, social and economic services, and grants to local governments, as well as most of the national tax revenue—with the exception of earmarked taxes—and some nontax revenue. The general account has usually generated surpluses, which have facilitated the transfer of funds to special accounts to offset any deficits from financing development operations. In 1994, the general account accounted for about 71 percent of total revenue and 59 percent of expenditure and net lending of the consolidated central government.

The central government special accounts have been established to finance specific projects and to manage special budgetary funds, with their revenues—usually supplemented by the general account—earmarked for specific expenditures. The most important of these accounts is the Fiscal Investment and Financing Special Account (FIFSA), which accounted for about one fifth of total expenditure and net lending of all central government special accounts in 1994. The FIFSA is mainly used for government investment in infrastructure and public enterprises, provision of policy loans by the Government, and management of the Government’s external debt. It is funded primarily by dividends from, and the sale of, government-held securities, borrowing from special budgetary funds, and transfers from the general account and other special accounts. The other special accounts have been established to pursue more specific government objectives, with their revenues earmarked exclusively for these objectives. However, as dependence on earmarked revenue has contributed to a weak revenue base, the special accounts rely on transfers from the general account despite the general principle of self-financing. The operations of special accounts have usually resulted in shortfalls which have tended to offset the surplus in the general account.

The public enterprise special accounts cover the activities of a small number of nonfinancial public enterprises whose transactions are closely linked to those of the central government, thus necessitating a consolidated approach and full integration into the budget. Their purpose has been to manage certain government enterprises, and, in this capacity, they do not cover the operations of the entire public-enterprise sector.

The special budgetary funds have been established to meet demands for various public services and achieve certain government objectives, principally the provision of financial support through net lending operations. Their number varies from year to year as government objectives change. Unlike the general account and special accounts, the special budgetary funds are outside the regular budgetary process of the consolidated central government and do not require deliberation and approval by the National Assembly. Their execution plans are formulated by the responsible ministry, approved by the President, and submitted to the National Assembly only for review. The special budgetary funds have been allowed considerable flexibility and discretion in budget execution as a result of their extra-budgetary nature. Several of them have run large deficits, affecting considerably the overall fiscal position of the consolidated central government. Recently, in an effort to improve fiscal discipline, the Government has started to integrate special budgetary funds into the formal budgetary process by abolishing problematic ones or consolidating their operations into special accounts. 1/ The special budgetary funds are not linked to the general account; instead, they transfer funds to or borrow from the FIFSA and other special accounts.

b. Local governments

There are approximately 300 local governments in Korea. Local governments have the power to formulate their own budgets which are approved by the respective local councils without requiring approval by the central government. 2/ However, the central government can exercise a degree of influence through limiting borrowing, providing grants from the general account to allocate revenue from sharing taxes, and underwriting local-government bonds. By law, a fixed portion of central government tax revenue is allocated to local governments in the form of grants. These grants have been used by the central government to correct fiscal imbalances and promote equality between the central and local governments and among local governments. In addition to these grants, local governments finance their operations with local tax and nontax revenue and local-government bonds.

c. Nonfinancial public enterprises

Nonfinancial public enterprises are productive entities in which the Government maintains ownership (i.e., it holds at least 10 percent of the outstanding equity) either directly or indirectly through other public entities. The extent of government ownership distinguishes them to government-invested enterprises (the Government holds at least 50 percent of the outstanding equity), and government-funded enterprises (the Government holds less than 50 percent of the outstanding equity). Subsidiary companies of government-invested enterprises are also classified as public enterprises.

Nonfinancial public enterprises operate on a commercial basis outside the consolidated central government budget, principally in the public utilities, manufacturing, and transport, storage and communications sectors. Their operations are financially independent from the budget, which includes only transfers to and from the public enterprises, notably through the public enterprise special accounts. Public enterprises are allowed to borrow from foreign sources, albeit subject to ceilings; however, they enjoy no special privileges on domestic borrowing.

3. Trends in fiscal operations

Fiscal policy has traditionally been an important vehicle for the Government’s medium-term objectives. 1/ During the early 1980s, stabilization took precedence, and the deficit of the consolidated central government budget was brought down from an average of 3.9 percent of GDP during 1980-82 to 0.9 percent of GDP during 1983-86. Following the overall success of the stabilization efforts and the improvement in the fiscal and external balances, the priorities of fiscal policy in the late 1980s shifted toward the provision of social services, income redistribution through tax reform, and the extension of the social security system. This reorientation came in response to public concern regarding improvements in social welfare and the distribution of the benefits of economic growth. In recent years, fiscal policy has focused on addressing pressing infrastructure needs, enhancing the country’s international competitiveness by investing in education and new technologies, and promoting social welfare.

a. Expenditure

Despite the important role the central government budget has played in support of government objectives, the size of the government (as expressed by the ratios of expenditure and tax revenue to GDP) has remained relatively moderate in relation to the size of the economy (Tables I.2 and I.3). 2/ The ratio of central government expenditure to GDP has remained at or below 20 percent, considerably lower than many other countries. The expenditure ratio declined substantially during the 1980s, as the Government’s principal objective shifted from promoting growth during the 1970s to stabilizing the economy and promoting efficiency with the assistance of fiscal consolidation. It increased again in the 1990s, reflecting government efforts to raise spending on infrastructure investment and other target areas, financed by an increase in the tax ratio.

Table I.2.Korea: Functional Classification of Central Government Expenditure and Net Lending, 1980-94
19801982198419861988199019921994
(In percent of total expenditure)
General public services8.59.29.010.09.08.59.89.6
Defense30.627.326.627.525.220.019.316.7
Education14.617.016.817.017.717.014.418.2
Social services 1/9.913.715.012.514.120.417.918.3
Economic services26.021.619.118.119.420.418.722.5
Grants and others 2/10.411.113.614.914.513.719.814.7
Total expenditure and net lending100.0100.0100.0100.0100.0100.0100.0100.0
(In percent of GDP)
General public services1.72.01.61.71.41.61.81.9
Defense6.25.84.94.64.03.73.63.3
Education2.93.63.12.82.83.12.73.6
Social services 1/2.02.92.72.12.23.83.43.6
Economic services5.24.63.53.03.03.83.54.4
Grants and others 2/2.12.42.52.52.32.53.72.9
Total expenditure and net lending20.121.318.316.615.718.518.719.7
Memorandum item:
General government expenditure and net lending24.325.322.320.619.523.525.126.3
Sources: Bank of Korea, Economic Statistics Yearbook; and data provided by the Korean authorities.

Includes health, social security and welfare, housing and community amenities, and other community and social services.

Includes transfers to local governments and interest.

Sources: Bank of Korea, Economic Statistics Yearbook; and data provided by the Korean authorities.

Includes health, social security and welfare, housing and community amenities, and other community and social services.

Includes transfers to local governments and interest.

Table I.3.Korea: Tax/GDP Ratio and Composition of Tax Revenue, 1980-94
19801982198419861988199019921994
(In percent of GDP)
Tax/GDP ratio
Total tax revenue 1/16.717.517.116.517.718.518.619.8
Of which:
National tax revenue14.615.415.014.615.214.914.615.5
(In percent of total)
Composition of tax
Total tax revenue 1/
Direct36.937.538.138.944.949.552.6
Indirect63.162.561.961.155.150.547.4
National tax revenue
Direct28.731.228.931.637.943.745.345.7
Indirect71.368.871.168.462.156.354.754.3
Sources: Economic Planning Board, The FY 1994 Korean Budget; data provided by the Korean authorities; and staff estimates and calculations.

Includes all national and local taxes.

Sources: Economic Planning Board, The FY 1994 Korean Budget; data provided by the Korean authorities; and staff estimates and calculations.

Includes all national and local taxes.

While the overall expenditure ratio has remained relatively moderate, the structure of expenditure has changed substantially since the early 1980s, mirroring shifts in national priorities. The share of defence spending in total outlays was reduced drastically, reflecting a successful rationalization effort and the gradual improvement in the external security environment. The reduction in the share of defence in the budget released substantial resources for other priority areas.

Expenditure in education has been maintained at around 3 percent of GDP since the early 1980s, supported by an education surtax that was introduced in 1982. The temporary decline in the expenditure share of education in 1992 reflected the transfer in the previous year of the education surtax to an education special account for local governments. However, the share of education increased subsequently, as education was accorded greater priority in the current five-year plan.

The shift in government priorities in the late 1980s was mainly reflected in increased spending on social services. The share of social services in the budget almost doubled during the last 15 years, mainly on account of increased spending on housing and community development projects, and financial support for social security programs. In the late 1980s, in particular, a sizable reduction in the share of defence spending facilitated a substantial increase in the share of social services in the budget.

The share of economic services in central government expenditure declined considerably during the first half of the 1980s. The decline reflected partly the higher priority given to social services, and also the change in government policies from direct support of industries to indirect support, focusing on measures to promote efficiency and competition. Nonetheless, the share rose again in the late 1980s when, in response to mounting infrastructure bottlenecks and calls for agricultural support, the Government increased spending on infrastructure investment and the restructuring of the agricultural sector.

Finally, grants to local governments have remained broadly stable in relation to GDP since the early 1980s, owing mainly to the fact that grants are a constant share of central government tax revenue, which grew roughly in proportion to GDP. A temporary increase in the early 1990s reflected the transfer of the education surtax in 1991 to an education special account for local governments.

b. Tax revenue

One of the principal objectives of tax policy since 1982 has been to reduce the regressiveness of the tax system by increasing the reliance on direct taxes through strengthening taxes on property and land. There were no major tax reforms in the 1980s, but a number of tax measures and tax incentives—the latter primarily aimed at housing construction—were introduced. The most important changes were the abolition of most tax privileges to heavy and export industries in 1981, the introduction of the education surtax in 1982, and the limited tax reform of 1988. The latter came in response to intense public calls regarding the distribution of income and wealth. Among the principal aims of the 1988 tax reform was the reduction in the tax burden of low- and middle-income individuals. This was accomplished by lowering the marginal tax rates of the personal income tax and the inheritance tax, increasing the personal exemption level of the income tax, and removing certain consumer durables from the list of items subject to the special excise tax. These measures slowed considerably the growth of tax revenue as evidenced by the temporary decline in the national tax ratio after 1988 (Table I.3).

Tax reforms in the 1990s were more comprehensive. In 1990, marginal tax rates of the personal income tax were reduced and a new tax on excess land profits was introduced to combat land speculation. As a part of the Five-Year Plan for the New Economy (1993-97), a multi-year tax reform plan was announced in 1993. 1/ The reform plan intended to: increase the fairness of the tax system by subjecting all financial income to taxation; improve its efficiency by expanding the revenue base and reducing marginal tax rates, exemptions and deductions; and, mobilize resources for expenditure in priority areas—such as infrastructure investment, education, social welfare, and the environment—by raising the tax ratio to about 22.5 percent of GDP by 1997.

Against the backdrop of these reforms, the national tax ratio remained broadly stable in the early 1990s, increasing only recently, partly on account of the implementation of measures in the multi-year tax reform plan. Notwithstanding a sizable increase in locally raised tax revenue in recent years, the local tax ratio remains relatively low. Measures aimed at reducing the regressiveness of the tax system by increasing direct taxation have resulted in a steady increase in the share of direct taxes in national tax revenue. Nevertheless, the Korean tax system continues to rely heavily on indirect taxes mainly for their administrative convenience.

c. Overall balance, financing, and debt

Despite the variety of objectives pursued by the central government and the operation of special accounts and funds which potentially complicate fiscal management, the government has maintained tight budgetary control. This achievement is owed to a broad consensus on fiscal conservatism, and has limited fiscal deficits, financing requirements, and government debt.

In support of the stabilization efforts in the early 1980s, the authorities were successful in controlling the budget deficit and central government debt (Table I.4 and Chart I.1). The budget deficit was brought under control within a few years and the commitment to fiscal discipline has since been maintained. For the first time since 1979, when the government consolidated its fiscal accounts into a unified budget, the balance of the consolidated central government registered a surplus in 1987 of about 0.2 percent of GDP. Since then, the consolidated central government budget has been, on average, roughly balanced.

Table I.4.Korea: Operations of the Consolidated Central Government, 1980-94
198019811982198319841985198619871988198919901991199219931994
(In billions of won)
Revenue7,2819,24710,07411,59513,04014,50515,85618,88223,10126,18732,45737,48643,76751,54861,741
Expenditure8,45511,35812,29612,54613,96315,21815,92118,62221,45826,20634,03541,50845,47050,73560,357
Overall balance-1,174-2,111-2,222-951-923-713-652601,643-19-1,578-4,022-1,7038131,384
Financing1,1742,1112,22295192371365-260-1,643191,5784,0221,703-813-1,384
Domestic8561,5781,546552613273211-270-9286231,9064,3052.014-366-989
Foreign318533676399310440-14610-715-604-328-283-311-447-395
(In percent of GDP)
Revenue19.119.418.418.117.717.716.616.817.417.618.117.418.219.320.2
Expenditure22.223.822.519.519.018.516.616.616.117.619.019.218.919.019.8
Overall balance-3.1-4.4-4.1-1.5-1.3-0.9-0.10.21.2-0.9-1.9-0.70.30.5
Financing3.14.44.11.51.30.90.1-0.2-1.20.91.90.7-0.3-0.5
Domestic2.23.32.80.90.80.30.2-0.2-0.70.41.12.00.8-0.1-0.3
Foreign0.81.11.20.60.40.5-0.2-0.5-0.4-0.2-0.1-0.1-0.2-0.1
Memorandum items:
Central government debt14.015.417.116.715.815.514.212.910.49.58.37.57.77.77.9
Public sector debt 1/19.016.615.112.511.610.49.69.910.18.0
Source: Data provided by the Korean authorities.

The public sector covers the central government and nonfinancial public enterprises.

Source: Data provided by the Korean authorities.

The public sector covers the central government and nonfinancial public enterprises.

CHART I.1KOREA: CENTRAL GOVERNMENT BALANCE, FINANCING, AND DEBT, 1980–94

(In percent of GDP)

Sources: Data provided by the Korean authorities; and staff calculations.

In the first half of the 1980s, about one third of the budget deficit was financed from foreign sources, aggravating Korea’s external debt problem. Following fiscal consolidation and the improvement in the balance of payments, foreign financing of the consolidated central government balance started registering net repayments in 1986, in line with the Government’s efforts to pay back its external debt. Against this background, central government debt fell from a peak of about 17 percent of GDP in 1982 to around eight percent in the 1990s.

4. Assessing the stance of fiscal policy

The preceding section has argued that fiscal policy in Korea has been used primarily for the achievement of the Government’s medium-term objectives. However, while short-term cyclical considerations have played a subordinate role in fiscal management, changes in the budget balance nevertheless affect aggregate demand, thus necessitating a closer examination of this influence.

Changes in the budget balance tend to be poor indicators of the cyclical impact of fiscal policy, because certain revenue and expenditure categories are affected by cyclical conditions and it is therefore not always clear whether such changes are the cause or the result of economic fluctuations. In order to overcome this shortcoming, special indicators of the cyclical impact of fiscal policy have been developed. 1/ One such indicator, the fiscal impulse measure, has been widely applied by Fund staff and is used in this section to examine the role of fiscal policy in recent business cycles in Korea. Fiscal impulse measures for different definitions of the central government balance and for different levels of government (central and general) are discussed. In addition, another fiscal indicator, the change in the structural balance, is briefly reviewed.

The basic idea underlying the fiscal impulse measure is that in order to assess the impact of changes in the budget balance on aggregate demand, it is necessary to adjust the balance for the effects of economic fluctuations on revenue and expenditure. The fiscal impulse measure does this by comparing the actual budget with a “cyclically-neutral budget”. 1/ The fiscal impulse concept has been criticized because it focusses on the overall cyclical impact of fiscal policy and fails to distinguish between discretionary policy measures and the effects of automatic stabilizers. The indicator based on the change in the structural balance attempts to overcome this shortcoming by adjusting for the effects of automatic stabilizers. It is thus a measure of the effects of discretionary fiscal policy rather than the overall cyclical impact of the budget. 2/

Calculations of fiscal indicators for the consolidated central government are summarized in Table I.5. The fiscal impulse calculations suggest that despite the relatively small size of the fiscal balance in relation to GDP, changes in the fiscal position have, on several occasions, had a substantial impact on changes in aggregate demand, and have at times, notably during 1990-93, been procyclical. 3/

Table I.5.Korea: Consolidated Central Government—Indicators of Fiscal Policy Responses, 1985-94(In percent of GDP)
1985198619871988198919901991199219931994
Overall balance-0.87-0.070.231.23-0.01-0.88-1.86-0.710.300.45
Fiscal stance 1/0.410.04-0.660.181.202.320.75-0.58-0.61
Fiscal impulse 2/-0.58-0.410.04-0.700.841.021.12-1.57-1.33-0.03
Structural balance 3/-0.47-0.07-0.110.62-0.25-1.29-2.46-0.820.510.54
Structural impulse 4/-0.46-0.340.05-0.710.791.081.38-1.33-1.23-0.09
Memorandum item:
Real GDP (annual percent change)6.9311.5511.5211.276.389.519.135.075.758.37
Sources: Data provided by the Korean authorities; and staff estimates and calculations.

Defined as the difference between a “cyclically-neutral budget” and the actual budget. The former is defined as the budget in which expenditures grow at the rate of growth of potential output in nominal terms, and revenues grow at the rate of growth of actual nominal output.

Defined as the change in the fiscal stance.

Defined as the difference between a “full-employment budget” and the fiscal stance. The former is defined as the budget in which expenditures and revenues grow at the rate of growth of potential output in nominal terms.

Defined as the (negative) change in the structural balance.

Sources: Data provided by the Korean authorities; and staff estimates and calculations.

Defined as the difference between a “cyclically-neutral budget” and the actual budget. The former is defined as the budget in which expenditures grow at the rate of growth of potential output in nominal terms, and revenues grow at the rate of growth of actual nominal output.

Defined as the change in the fiscal stance.

Defined as the difference between a “full-employment budget” and the fiscal stance. The former is defined as the budget in which expenditures and revenues grow at the rate of growth of potential output in nominal terms.

Defined as the (negative) change in the structural balance.

While fiscal policy was, on average, moderately restrictive during the expansion of 1986-88, it turned expansionary in 1989 in an effort to offset partly a sharp decline in net foreign demand. Fiscal policy remained expansionary in the 1990-91 expansion, imparting a substantial procyclical impact on aggregate demand. After a roughly balanced budget in 1989, the fiscal position moved into deficit in 1990, which widened further in the following year to nearly 2 percent of GDP. The deterioration in the fiscal position was mainly due to expenditure increases in priority areas, and tax measures designed to increase equality which lowered revenue growth. The combined effect of these measures implied a positive fiscal impulse of over 1 percent of GDP per year in 1990-91, which contributed to the rapid growth in aggregate demand and the overheating of the economy.

In 1992, tighter monetary policy and restrictions on construction activity to rein in aggregate demand led to a cyclical downturn. Fiscal policy reinforced the cyclical downturn. Despite strong revenue growth, expenditure was kept subdued in 1992 and the deficit narrowed, with an attendant withdrawal of stimulus of over 1.5 percent of GDP. Fiscal policy remained restrictive in 1993, despite the initially moderate pace of the recovery. Cuts in planned expenditure in anticipation of shortfalls in revenue—which did not materialize—resulted in an unexpected budget surplus, which implied again a substantial withdrawal of stimulus. Most recently, however, the Government has paid somewhat more attention to the cyclical impact of fiscal policy. In 1994, in line with cyclical requirements, fiscal policy avoided adding to resource pressures and was broadly neutral, with the surplus of the consolidated central government increasing slightly to about 0.5 percent of GDP.

The results in Table I.5 suggest that alternative measures of the cyclical impact of fiscal policy during 1985-94—i.e., the fiscal impulse and changes in the structural balance—convey essentially the same picture. A question that needs to be addressed, however, is whether the definition of the fiscal balance that was used for the calculations—the balance of the consolidated central government on a cash basis—is the appropriate measure of fiscal operations. In particular, two issues need to be clarified: the choice of an accounting system, and the coverage of government.

The first issue concerns the choice between a cash-based and a national accounts-based accounting system. While a cash-based accounting system is more closely linked to financing flows—and thus seems preferable when the analysis focuses on the financial implications of fiscal operations—a national accounts-based concept is more closely related to developments in aggregate demand. In particular, in a cash-based accounting system, net lending and asset sales by the Government are included in expenditure and revenue, respectively, thus affecting the overall fiscal position and the measured stance of fiscal policy, even though they do not directly affect aggregate demand. In the case of net lending, the Government mainly acts as a financial intermediary, while an asset sale is in essence a change in the liquidity structure of government assets. National accounts data correct for this shortcoming by focusing on real, rather than financial transactions. A national accounts-based measure of the budget balance may thus be more appropriate for an analysis of the effect of the budget on real economic activity.

The second issue concerns the scope of government operations. Since the operations of local governments are significant in size and, to a considerable degree, influenced by the central government, a broader coverage of government might be more appropriate for capturing the true impact of government operations on the economy.

Table I.6 compares fiscal impulse indicators for different definitions of the government balance (using cash- and national accounts-based data) and for different levels of government. For most years, the indicators calculated from cash- and national accounts-based data for the central government are fairly similar, but in some cases they differ significantly. In 1985, 1986, and 1990, for example, the two measures point in opposite directions. The fiscal impulse measure calculated for the cash-based balance of the central government excluding net lending operations suggests that the latter account for a large part, albeit not all, of the difference between the two measures. Other factors, notably differences in the timing of reporting transactions (cash versus accrual method) and the treatment of asset sales, appear to have played a role as well.

Table I.6.Korea: Alternative Measures of the Fiscal Impulse of Various Definitions of Government, 1985-94(In percent of GDP)
1985198619871988198919901991199219931994
Central government 1/
Cash basis-0.18-0.67-0.18-0.780.911.011.08-1.54-1.450.43
Cash basis (excluding net lending)0.100.22-0.32-0.700.77-0.211.23-0.97-1.28-0.12
National accounts basis0.210.21-0.35-1.010.20-0.420.88-0.23-1.42
Consolidated central government 2/
Cash basis-0.58-0.410.04-0.700.841.021.12-1.57-1.33-0.03
Cash basis (excluding net lending)-0.300.48-0.11-0.620.70-0.211.27-1.00-1.16-0.59
National accounts basis
General government 3/
Cash basis0.08-0.89-0.63-0.640.310.891.57-1.15-2.36
Cash basis (excluding net lending)0.18-0.06-0.70-0.61-0.08-0.071.73-0.68-1.95
National accounts basis0.13-0.06-0.73-0.75-0.50-0.271.550.12-1.62
Sources: Bank of Korea, National Accounts and Economic Statistics Yearbook; data provided by the Korean authorities; and staff estimates and calculations.

Includes: on a cash basis, the central government (general account, the special accounts and the special budgetary funds); on a national accounts basis, the central government and the social security funds (after netting out the relevant intragovernmental transfers).

Includes the central government and the public enterprise special accounts.

Includes: on a cash basis, the central government and the local governments (excluding public enterprise special accounts of the central and local governments); on a national accounts basis, the central government, the local governments and the social security funds.

Sources: Bank of Korea, National Accounts and Economic Statistics Yearbook; data provided by the Korean authorities; and staff estimates and calculations.

Includes: on a cash basis, the central government (general account, the special accounts and the special budgetary funds); on a national accounts basis, the central government and the social security funds (after netting out the relevant intragovernmental transfers).

Includes the central government and the public enterprise special accounts.

Includes: on a cash basis, the central government and the local governments (excluding public enterprise special accounts of the central and local governments); on a national accounts basis, the central government, the local governments and the social security funds.

A comparison of the fiscal impulse measures for the central and general government, both on cash and national accounts basis, suggests that the fiscal operations of local governments generally have a relatively small effect on aggregate demand. Nevertheless, while both measures generally point in the same direction, in some years, the magnitude of the cyclical impact is quite different.

To summarize, alternative fiscal impulse measures calculated for different definitions of the fiscal balance and for different levels of government do not fundamentally change the assessment of the cyclical impact of fiscal policy outlined above.

5. Conclusion

This chapter has examined the structure of Korea’s public finances and the conduct of fiscal policy since the early 1980s. The analysis revealed a number of salient features. First, despite some constraints imposed by the structure of public finances, the Korean Government has generally managed to maintain tight budgetary control. Second, the size of the government has remained relatively small in relation to GDP, even though a wide range of objectives have been assigned to fiscal policy. The objectives have generally been met by shifting the composition of expenditure, rather than increasing the overall size. Finally, fiscal policy has primarily been used to serve the Government’s medium-term fiscal objectives, and has, until recently, paid limited attention to the cyclical impact of the budget on the economy. As a result, fiscal policy has sometimes amplified cyclical movements in private demand. This has been confirmed by a range of indicators of the stance of fiscal policy. However, since 1994, fiscal policy appears to have paid somewhat more attention to the cyclical impact of the budget, striking a balance between meeting cyclical requirements and medium-term objectives.

References

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1/Prepared by Dimitri Tzanninis.
2/The first of these medium-term fiscal plans went in effect in 1982 to provide general guidelines for the operation of fiscal policy in accordance with the broader development objectives and national priorities set out in the Five-Year Economic and Social Development Plans. The fiscal plans are revised annually, taking into account the macroeconomic environment and the fiscal outlook.
1/Table 15 in the Statistical Tables lists these accounts and funds.
1/One such fund, the Grain Management Fund, was abolished in 1994 due to excessive accumulation of debt in grain-support operations. Its operations were taken over by the Grain Management Special Account.
2/In general, local-government budgets include a general account, a number of special accounts (including an education special account), and local public enterprise special accounts.
1/The principal objectives of the previous two Five-Year Economic and Social Development Plans were: economic stability, efficiency, and balanced regional and sectoral development (1982-86); and, social welfare, efficiency, and equity in the distribution of income and wealth (1987-1991). The current Five-Year Plan for the New Economy (1993-1997) has set the objectives of enhancing the growth potential of the economy, promoting internationalization, and improving the standards of living.
2/The fiscal year coincides with the calendar year for all levels of government.
1/Details of the plan are discussed in “Korea - Recent Economic Developments” (SM/94/28, 1/31/94), Chapter III.
1/For a detailed discussion of such fiscal indicators see Heller et al. (1986).
1/The difference between the actual budget and the cyclically-neutral budget is defined as the fiscal stance. The fiscal impulse refers to changes in the fiscal stance and thus measures the impact of fiscal policy on changes in aggregate demand. For a more detailed description of the calculation of the fiscal impulse see footnotes to Table I.5, as well as Heller et al. (1986).
2/See footnotes to Table I.5 for details on the calculation of the structural balance.
3/Positive fiscal impulse statistics imply expansionary stance of fiscal policy.

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