※ This report is to be featured in KDI Economic Outlook 2017-2nd Half.
■ Fiscal risks such as rising compulsory expenditure can reduce future fiscal space, and increases in government debt up to the fiscal space heavily burden the national economy.
○ The Korean economy will be able to cover an additional government debt up to 200-250% of GDP if the current economic growth rate and fiscal expenditure structure are sustained.
○ However, in order to withstand the enlarged debt, the national economy will have to bear a huge burden, such as a sharp hike in the income tax rate and resultant decreases in income and consumption.
○ Meanwhile, if the growth rate decreases and/or compulsory expenditure increases in the future, the fiscal space may reduce to 40-180% of GDP.
■ Recent government debt management shows gradual improvements, but there is a lack of the momentum in the mid-term.
○ The primary fiscal deficit narrowed in 2016, implying that government debt management has slightly improved.
○ A similar fiscal stance will be maintained in the 2018 budget as this year, hinting at a continuation of the recent efforts to manage the government debt.
○ Meanwhile, the mid-term plan shows that debt management efforts will continue to improve until 2019 but wane thereafter.
■ Thus, future fiscal policies should sustain the current debt management efforts, carefully considering additional fiscal spending needs, in view of fiscal risks.
○ It is desirable to maintain the efforts to manage government debt while carefully responding to the mid- to long-term fiscal demand.
○ Fiscal expansion should be executed if necessary, but the size of expansion should be carefully decided considering the economic costs of increasing government debt and the fiscal risks contracting the future fiscal space.
○ Meanwhile, it is necessary to reduce government debt when the growth rate of the tax revenue is relatively high in order to reduce the costs related with government debt in the medium to long run.
Enquiries: Tae suk Lee (Fellow at KDI)
Jin Wook Hur (Fellow at KDI)