신정부 재정정책의 여건과 발전방향 = Fiscal Policy for the New Government in Korea: Challenges and Policy Agenda

다국어 초록 (Multilingual Abstract)

This paper examines environment and challenges of fiscal policy faced by the Korean new government, and suggests the directions of fiscal policy reform. Our suggestions are based on three analyses: documentation of level and trend of fiscal position and composition, literature survey on the purpose and effectiveness of fiscal policy, and the empirical analysis on the normal level and composition of fiscal revenue and expenditure. The size of government in Korea is relatively small compared to other OECD countries. After controlling for the economic development, country size, population composition, and political ideology of government, however, we find that fiscal revenue is already larger than the predicted level and the gap between actual and predicted level of fiscal expenditure significantly decreases to 3.7%p. In terms of composition of fiscal expenditure, we find that expenditure on economic affairs and defense are larger than the predicted level, and that expenditure on social protection, health, and general administration are smaller than the predicted level. For the revenue side, it is found that taxes on corporate income, consumption, and property are larger than the normal level, and that taxes on individual income and social security are smaller. We summarize the objectives of fiscal policy in four items: enhancing equity, improving efficiency, stabilizing economy, and keeping fiscal soundness. We point out that the effects of taxes on equity are large and income taxes can be an effective tool to enhance equity. We suggest 15 key directions of fiscal policy for the Korean new government: controlling the size of government, controlling the increase in social protection expenditure, enhancing the efficiency of social protection expenditure, reforming pension, reforming the composition of expenditure, enhancing the efficiency of fiscal expenditure related to loans to SMEs and farmers, reforming local public finance, reforming tax system more conducive to economic growth, improving effective progressivity of individual income taxes, lowering the tax burden of corporations, broadening further the tax base, decreasing deductions and tax credits, lowering the tax burden related to property, enhancing the management of fiscal expenditure, and improving the efficiency and transparency of public debt management.