A New Strategy for Korea’s Fiscal Policy in a Low Growth Environment
IMF Working Papers, April 24, 2018
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- A New Strategy for Korea’s Fiscal Policy in a Low Growth Environment
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Bibliographic details
- Authors: Edda Zoli, Hou Wang, Douglas Laxton
- Published: April 24, 2018
- Series: IMF Working Papers
Summary of the paper
- Adverse demographics and other structural weaknesses impinge on Korea’s long-term fiscal outlook and potential growth.
- Inadequate social protection is creating poverty and dampening consumption.
- The paper uses new estimates of potential growth obtained with a novel multivariate filter.
- Keeping fiscal revenues-to-GDP constant would result in an explosive public debt dynamic in the long term.
- Simulations are conducted with the Flexible System of Global Models to analyze policies that preserve fiscal sustainability while boosting potential growth and social protection.
- Conclusion: with greater revenue mobilization, Korea can stabilize debt-to-GDP well below “dangerous” levels.
Projections and modeling approach
- Potential growth estimated using a novel multivariate filter (new estimates of potential growth).
- Long-term fiscal outlook projections indicate that a constant fiscal revenues-to-GDP ratio produces an explosive public debt dynamic.
- Policy simulations implemented through the Flexible System of Global Models to quantify effects on debt dynamics, potential growth, and social protection.
Key findings
- Demographics and structural weaknesses materially weaken Korea’s long-term fiscal outlook and potential growth.
- Inadequate social protection contributes to poverty and reduces consumption.
- Greater revenue mobilization is necessary to stabilize debt-to-GDP well below “dangerous” levels.
- Fiscal inaction (constant revenues-to-GDP) leads to an explosive path for public debt.
Policy recommendations
- Increase revenue mobilization to restore fiscal sustainability and stabilize debt-to-GDP well below “dangerous” levels.
- Implement higher targeted transfers to the most vulnerable to strengthen social protection and support consumption.
- Adopt fiscal measures to support female labor force participation and employment.
- Complement fiscal measures with product and labor market reforms to boost potential growth and address structural weaknesses.
Edda Zoli, Hou Wang, and Douglas Laxton. "A New Strategy for Korea’s Fiscal Policy in a Low Growth Environment", IMF Working Papers 2018, 091 (April 24, 2018).
Content in this bundle
- A New Strategy for Korea’s Fiscal Policy in a Low Growth Environment, WP/18/91, April 2018