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Title 2020 Long-Term Fiscal Outlook by NABO

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    2020-09-28

2020 Long-Term Fiscal Outlook by NABO

 

Published on Sept. 28, 2020
Published by Estimates and Tax Coordination Division, Estimates & Tax Analysis Department

 


   This report projects fiscal aggregates affected by demographic changes between 2020 and 2070 after taking into account the effects of the third supplementary budget in 2020, while assuming that the rules and regulations implemented at present time will remain valid during the projection period.

 

   Based on these results, various fiscal sustainability analyses were conducted and scenario analysis results related to change in population projection assumption and discretionary expenditure reductions were presented.

 

   Results of the long-term fiscal projections based on the constant price in 2020 indicate that total revenues are projected to increase by 1.3% per annum from 439.2 trillion won in 2020 to 817.5 trillion won in 2070, while total expenditures are projected to increase by 1.6% per annum from 550.3 trillion won in 2020 to 1,216.1 trillion won in 2070. Of total expenditures, the proportion of mandatory expenditures is projected to rise from 46.9% in 2020 to 62.6% in 2070, as mandatory expenditures is projected to rise by 2.2% per annum from 258.2 trillion won in 2020 to 761.9 trillion won in 2070. The consolidated fiscal balance deficit is projected to increase from 111.1 trillion won in 2020 to 398.6 trillion won in 2070, and the managed fiscal balance deficit is projected to increase gradually from 121.8 trillion won in 2020 to 222.1 trillion won in 2070. Additionally, government debts are projected to increase from 860.1 trillion won in 2020 to 6,789.9 trillion won in 2070, enlarging their ratio to GDP from 44.5% to 185.7% during the set period.

 

   Various analyses were conducted on fiscal sustainability based on the result of long-term fiscal projections. First, fiscal sustainability was tested using Bohn’s test. It was analyzed that if the current fiscal policies remain the same, the government debt ratio continues to rise, but the government will not respond to improve the primary balance (PB) from 2031 onward. In addition, according to the estimates of the government’s fiscal space using projection data including the Korea’s PB, national debt-to-GDP ratios, GDP gaps and government expenditure gaps since 2019, there is currently enough fiscal space; however, it is bound to shrink dramatically over time. Furthermore, risk factors stemming from the national pension and the teachers’ pension, which one long-term social insurance, were examined. The cumulative fiscal deficits by 2070 are projected to be 61.3% of GDP for the national pension and 2.4% of GDP for the teachers’ pension. If the current system remains unchanged the national and teachers’ pensions will show continuous deficits in the long run possibly creating an adverse effect on the nation’s finances.

 

   As one of the measures to address these risk factors, as found in the EU, the US, and the UK long-term fiscal projections, improvements in PB that are required to reach the target level of national debts by the end of the projection period were calculated. For example, in order for the national debt ratio in 2070 to reach 80%, which is the simple average level of general government gross financial liabilities in OECD member countries as of 2018, it is necessary to improve the PB by 2.54%p as a percentage of GDP per year starting in 2021. However, the analysis indicates that if efforts to improve PB begin in 2030, achieving the same target national debt ratio will require an annual 2.98%p improvement of PB as a share of GDP due to the increased cost from such a delayed policy response.

 

   Analysis was also conducted for different scenarios regarding population projection and discretionary expenditure projection methods, which are among the factors affecting the long-term fiscal outlook. First, the population projection scenario analysis shows that if a low population scenario is realized, the national debt ratio is projected to increase by 13.3%p compared to the median standard in 2070. The national debt ratio based on a high population scenario is projected to decrease by 6.2%p compared to the median standard in 2070. Next, two scenarios were discretionary expenditures, which are determined annually by the National Assembly's deliberation of budget bills every year, not by law. Then, how much the government debt ratio could be reduced by implementing each scenario was examined. Under the scenario where 10% of the increase in discretionary expenditures is reduced compared to the previous year, the national debt ratio is projected to 161.9%, a 23.8%p lower be than the baseline scenario in 2070. Under the scenario where discretionary expenditures increase at the same rate as CPI, the national debt ratio is projected to be 99.3%, a 86.4%p lower than the baseline scenario in 2070.

 

   Results of Korea's long-term fiscal outlook, where the national debt ratios are rising rapidly, are also found in other countries that have published their own long-term fiscal outlook reports. These reports emphasize that the results of their projections were drawn on the premise of maintaining current rules and regulations, and that the governments will not allow their national finances to follow the trajectories. In other words, the results of the long-term fiscal outlook are meaningful in providing the National Assembly and government with preliminary data for discussions regarding how much and in what capacity the revenue and expenditure structures should be adjusted in the long term to secure fiscal sustainability.

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