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Title A Study on the Fiscal Analysis Model of the Sector-Specific Economic Effect

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A Study on the Fiscal Analysis Model of the Sector-Specific Economic Effect

30 November 2016
Fiscal Policy Analysis Division of the Economic Analysis Office

  This report is a research report on the revised and improved version of the NABO Macro-Fiscal Econometric Model which was developed in 2015 to analyze the sector-specific effects of fiscal expenditure on the economy.
  The low growth trend since the 2008 global financial crisis has brought about severe budget constraints. In order to reach the fiscal policy objectives under such conditions, efficient fiscal management has become even more important. While the direction of fiscal expenditure may be determined based on a number of variables including economic effects, political decisions to incorporate the preferences and demands of the Korean people and social conditions; there is a growing need for a variety of scientific analyses to set the direction for efficient resource allocation in a low growth era. In particular, the economic impact of fiscal expenditures needs to be analyzed since they have different impacts on each spending areas of the macro-economy such as income, market price and employment.
  In this study, the 2015 NABO Macro-Fiscal Econometric model was modified and expanded to enable a sector-specific analysis of economic effects. Also, fiscal multiplier estimates were made for each year, upon which an analysis on the economic impact was made with the incorporation of the effects of budget increases or decreases as well as the changing multiplier. In particular, it is worth noting that this analysis draws upon the effects of fiscal expenditure on growth enhancement and job creation, providing a comparison of economic effects in the medium term between major expenditure sectors (such as land and regional development, social welfare.)
  The overall results of this study show that the fiscal multiplier applied to the 2014 budget was highest, and the multipliers are decreased moving towards the 2017 budget proposal. Upon calculating the sector-specific economic effects, the land and regional development sector and social welfare sector exhibited outstanding results. In the case of land and regional development, although the budget for the sector decreased from the previous year, there had been a higher decrease in capital expenditure which had a low multiplier than in goods and services which had a high multiplier, thereby not having a significant impact on economic growth decline. On the other hand, the budget volume for social welfare continued to increase year-on-year with the growth rate of newly employed workers higher than in other areas. However, it was the transfer which has a low multiplier that increased, leaving limited effects on economic growth per allocation. As it is difficult to make a direct comparison by sector of the economic effects of a budget increase or decrease, this study concludes that it is desirable to apply sector-specific fiscal multipliers to identify the economic effects per allocation.
  This study also provides future research plans including the improvement of the fiscal sector in the econometric model, the development of an analysis model for income redistribution effects and rational resource allocation plans in terms of politics, administration and the economy.
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