Session 3: Policy Evaluation for Tax and Fiscal Policy
SPEAKERS
ㅇAlan Auerbach (Robert D. Burch Professor at University of California, Berkeley / Director of the Burch Center for Tax Policy and Public Finance)
<“Tax and Fiscal Policy and Its Evaluation in the US”>.
▸The fiscal conditions in the United States are unsustainable and have worsened due to the COVID-19 situation.
▸While fiscal stimulus measures were powerful tools for stabilizing the economy during an economic downturn, they have proven less effective in recent years.
ㅇ Toshihiro Ihori (Professor Emeritus at National Graduate Institute For Policy Studies / Former Professor at Tokyo University)
<“Tax and Fiscal Policy and Its Evaluation in Japan”>.
▸Proposed two measures to strengthen the deteriorating fiscal soundness due to factors such as an aging population and economic stimulus policies.
▸Extensive restructuring of the tax system, an increase in consumption taxes, and the expansion of the tax base are necessary to reduce significant fiscal deficits.
▸Tax and fiscal reforms should be implemented both in medium and long-term.
DISCUSSION HIGHLIGHTS
CHAIR
Il Ho Yoo (Former Deputy Prime Minister for Economic Affairs / Former President of Korea Institute of Public Finance)
DISCUSSANT
Chul In Lee (Professor at Seoul National University / Chairman of Korean Association of Public Finance)
Ki-Sun Bang (First Vice Minister of Economy and Finance)
ㅇ Ki-Sun Bang (First Vice Minister of Economy and Finance)
-400 trillion increase in fiscal deficit in the last 5 years, and the deficit could go from 600 trillion to 1000 trillion Korean won.
– Despite the government’s austerity efforts, this year’s budget includes about 60 trillion won in national debt and deficit debt.
– The fiscal balance has been deteriorating at a rapid pace, with the managed fiscal balance falling to -2.8% in 2019, -5.8% in 2020, and -5.4% in 2022, resulting in a sharp increase in the national debt.
– In the past, a 5% overall growth typically translated to 4% private sector growth. However, under the previous government, the growth rate dropped to below 60%. 3% private sector growth is made at a 5% growth rate and it means a real private sector growth less than 3%, and the rest is mostly driven by increase of fiscal spending.
– We need to save a little more money because birthrate is rapidly declining and aging population and welfare expenditures are increasing at a rapid pace. There is also the issue of unification, so we need to have a reserve for fiscal expenditures.
– If you look at the government’s five-year plan, it will be noticed that, before Moon’s administrations, the growth rate of fiscal expenditure was around 3%. However, but over the past five years, fiscal expenditure has surged to nearly 9-10%. Therefore, the current government aims to stabilize the growth rate of fiscal expenditure at least around 4%.
– Corporate taxes are relatively high compared to OECD countries. The government is working on reducing them, but this is challenging due to the parliamentary process.
– Concerning income tax, there is a 35% tax exemption, meaning that 35% of the population pays no income tax. Nevertheless, we are trying to alleviate the tax burden on the population by lowering the lowest income tax bracket.
– Although there are concerns about tax revenue following tax cuts, but these mainly pertain to corporate taxes and real estate taxes, which were excessively high under the previous government. As a result, we are not significantly reducing the overall tax burden.
– In terms of fiscal spending and tax reform, maintaining fiscal prudence remains a top priority. Therefore, it is crucial to have fiscal code approved by the National Assembly to ensure smooth operation.
ㅇ Chul In Lee (Professor at Seoul National University / Chairman of Korean Association of Public Finance)
– We need to lower the national debt by increasing tax revenues.
– Government spending is increasing unprecedentedly.
– Continuing QE will only make the situation worse and unsustainable.
– Korea’s debt is approximately 50% whereas the US and Japan have debt levels exceeding 100%. With the continuous expansion of welfare programs, it is possible that Korea may eventually resemble the US and Japan in terms of its debt situation.
– In terms of fiscal discipline, both Japan and Korea appear to be less sensitive to their growing debt burdens.
– These are negative signals for the markets and will require market stabilization measures.
– It is essential to implement tax reform or redesign that considers not only capital gains but also the challenges posed by aging populations and low birthrates.
– Finally, fiscal policy has been overly aggressive and excessively utilized during the crisis. It’s now imperative to address and rectify the situation.
<PERI, Policy Evaluation Research Institute>
