A New Strategy for Korea's Fiscal Policy in a Low Growth Environment

28 Pages Posted: 23 May 2018

See all articles by Edda Zoli

Edda Zoli

International Monetary Fund (IMF)

Hou Wang

International Monetary Fund (IMF)

Douglas Laxton

International Monetary Fund (IMF) - Research Department

Susanna Mursula

International Monetary Fund (IMF)

Jiaxiong Yao

International Monetary Fund (IMF)

Date Written: April 2018

Abstract

Adverse demographics and other structural weaknesses impinge on Korea's long-term fiscal outlook and potential growth. Moreover, inadequate social protection is creating poverty and dampening consumption. The paper presents projections of Korea's fiscal outlook, using new estimates of potential growth obtained with a novel multivariate filter. It shows that keeping fiscal revenues-to-GDP constant would result in an explosive public debt dynamic in the long term. Then, through simulations of the Flexible System of Global Models, the paper analyzes policies to preserve fiscal sustainability, while boosting potential growth and social protection. It concludes that with greater revenue mobilization, Korea can stabilize debt-to-GDP well below 'dangerous' levels. Policies to address Korea's challenges include higher targeted transfers to the most vulnerable and fiscal measures to support female labor force participation and employment, accompanied by product and labor market reforms.

Keywords: Asia and Pacific, Korea, Republic of, aging; long-term fiscal sustainability; structural reforms; potential output, aging, long-term fiscal sustainability, structural reforms, potential output, Forecasting and Simulation

JEL Classification: E12, E17, E62, H53, H55, H63

Suggested Citation

Zoli, Edda and Wang, Hou and Laxton, Douglas and Mursula, Susanna and Yao, Jiaxiong, A New Strategy for Korea's Fiscal Policy in a Low Growth Environment (April 2018). IMF Working Paper No. 18/91, Available at SSRN: https://ssrn.com/abstract=3183298

Edda Zoli (Contact Author)

International Monetary Fund (IMF) ( email )

700 19th Street NW
Washington, DC 20431
United States

Hou Wang

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Douglas Laxton

International Monetary Fund (IMF) - Research Department ( email )

700 19th Street NW
Washington, DC 20431
United States

Susanna Mursula

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

Jiaxiong Yao

International Monetary Fund (IMF) ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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