E ach government’s recovery from the 2008 global financial crisis through active fiscal policies and the latest European debt crisis have reawakened the significance of national fiscal policies and sustainability, said Joo Young-jin, chief of the National Assembly Budget Office (NABO).

“In Korea, the fiscal situation, which is fast improving quantitatively from a compromised fiscal balance due to policy responses to the crisis, is rated to be relatively sound, but fiscal conditions are forecast to not be upbeat in the mid- to long-term perspective,” Joo said.

He cited the 2012-2060 Long-Term Economic Outlook and Fiscal Analysis, the first such publication released by the NABO this past June. The report said that although Korea’s fiscal balance, which has suffered a setback to a certain degree in managing risk factors, has been recovering fast recently, it is bound to face various obstacles in the long run. Population structure transformation due to a low  birth rate and aging, the deceleration of the potential growth rate, a reduced tax base, and sharp increase in welfare spending are some of the expected risk factors, the report said.

According to the report, to soundly manage the nation’s finances, long-term outlooks that make projections beyond 30 years are essential. The National Finance Act mandates the administration to include a mid- and long-term outlook in the National Fiscal Management Plan, which the administration submits to the National Assembly each year. The IMF and OECD also recommend the production of long-term fiscal projections, and the United States’ Congressional Budget Office, the European Union, and the United Kingdom already published their own long-term fiscal projections. 

This report is based on the population projections up to 2060 from Statistics Korea, and the projected macro economy is based on long-term population structure transformation, total revenue, total expenditure, fiscal balance, and national debt. Also, the report includes analyses on fiscal sustainability and generational burden based on the projection results, and makes recommendations for policy measures to secure fiscal sustainability and to resolve generational inequity. 

Joo said the government submitted the 2012 budget proposal to the National Assembly on Sept. 28. According to the proposal, total revenue for 2013 is forecast to rise to 373.1 trillion won, up 8.6 percent or 29.6 trillion won over this year, and total spending will be 342.5 trillion won, an increase of 5.3 percent or 17.1 trillion won over this year, to rack up a 30.6 trillion won surplus in the consolidated fiscal balance and a 4.8 trillion won deficit in the managed fiscal balance. Sovereign debt for 2012 will increase 18.9 trillion won to 464.8 trillion won, accounting for 32.2 percent in the ratio of sovereign debt to GDP. The 2012 budget proposal has failed to ensure a fiscal balance as originally planned, but may be construed as one designed to head for a path toward fiscal balance. Despite these, he said, given the small-size and openness of the national economy, and being as it is susceptible to the effects of the recent external and internal economic uncertainties, the National Assembly should engage in in-depth discussions about the fiscal policies of economic stimulus and fiscal sustainability while delivering the 2013 budget proposal.  

Assuming that the national economy will grow about 4 percent in real terms during 2013, the government projected total revenues at 373.1 trillion won, up 8.6 percent over this year. National tax revenues are estimated to increase 5.2 percent in 2012 over this year, lower than the overall revenue growth rate, while non-tax revenues and fund revenues are forecast to soar 32.6 percent and 8.9 percent, respectively, higher than the overall revenue growth rate.

Unlike the government’s GDP growth forecast, the NABO put the real economic growth rate at 3.5 percent, the Bank of Korea predicted a 3.2 percent growth rate, and Korean and foreign research institutes forecast that the figure will be around 3 percent. The reality is that the government’s revenue goal cannot be attainable. Prospects on non-tax revenues are also the same. 

The 2013 budget proposal divides total spending into non-discretionary spending and discretionary spending for the first time in accordance with a revision of the National Finance Act. There needs to be institutional reform to hold back non-discretionary entitlements. 

Korea has seen the foreign debt rate versus GDP lower compared to major advanced countries, but fiscal sustainability in the long-term perspective is unpredictable, he said.