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KDI - Korea Development Institute

KDI - Korea Development Institute



Policy Study Economic Effects of Sectoral Fiscal Expenditure and Policy Implications December 31, 2022


Series No. 2022-02

Policy Study KOR Economic Effects of Sectoral Fiscal Expenditure and Policy Implications #Fiscal Balance and Fiscal Policy #National Budget #Fiscal Policy
DOI P-ISBN979-11-5932-766-7 E-ISBN979-11-5932-771-1

December 31, 2022

  • 프로필
    LEE, Kangkoo
This study presents an agreeable standard among various criteria used for discussions in setting the upper limit on financial resource allocation by sector via economic effect analysis. A dynamic stochastic general equilibrium (DSGE) model estimates fiscal multipliers according to economic character classification. In the DSGE model, economic agents (households, businesses, government, etc.) are equipped with microeconomic foundations for making optimal choices with reasonable future expectations, and macroeconomic variables (consumption, investment, etc.) are linked to fiscal spending. Sectoral fiscal outlays sorted by economic qualities have these multipliers to calculate economic impacts over the past six years, both on average and per input unit.

To summarize the findings of this study, the economic effects range from least to greatest in order of social welfare, national defense, general & local public administration, education, health, environment, and public order & safety. However, the impact on social welfare, general & local public administration, and education is more significant because of the sheer size of the budget increase from the previous year. Accordingly, from most to least, the effect per budget unit can be listed from transportation & logistics, public order & safety, national defense, environment, and agriculture & fisheries to health. In addition, the public order & safety and defense sectors, which have a high proportion of government consumption, show a gradual decrease in economic effects over the medium term. On the other hand, transportation & logistics and environment, with a high proportion of government investment, show an increased impact in the same time frame.

Sorting by economic characteristics per consolidated fiscal balance may lead to heterogeneous economic ripple effects bundled together as one group and making decisions with social and political factors instead of economic ones. Also, even in the presence of limitations in research, like the assumption of a closed economy model, the impact of economic growth estimated in this study can be used as a sensible reference for preparing guidelines for making sectoral priorities for efficient spending or budgeting in line with economic characteristics and deciding fiscal reforms in the order of importance. That is, this study offers key implications for policymaking that, with expenditure ceilings put in force lately, earmarking more funding for budget categories with greater economic knock-on effects and restructuring ineffective budgets can ensure sound fiscal management in response to the expected economic slowdown.
Publisher's Note

Chapter 1 Introduction

Chapter 2 Structure of Budget in South Korea and Previous Studies
 2. 1 Classification of Expenditure Budget in South Korea
 2. 2 Previous Studies

Chapter 3 Fiscal Multiplier Model and Calculation
 3. 1 New Keynesian DSGE Model
 3. 2 Results of Fiscal Multiplier Estimation by Economic Characteristics
 3. 3 Meta-Analysis of Fiscal Multipliers in South Korea

Chapter 4 Calculation of Economic Effects of Sectoral Fiscal Expenditure
 4. 1 Trends in Sectoral Fiscal Expenditure
 4. 2 Calculation of Economic Effects of Sectoral Fiscal Expenditure

Chapter 5 Policy Implications

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