Session 1 : PERI-Brookings Fiscal policy

Session 1 : PERI-Brookings Fiscal policy

SPEAKERS

Louise Sheiner(Policy Director for Hutchins Center on Fiscal and Monetary Policy, The Brookings Institution)

<“Fiscal Challenges in the US and the Fiscal Ship Game”>

Upon examining the federal finances of the United States, expenditures such as social security and defense have significantly outweighed revenues since the 2000s. The federal budget deficit and public debt have continued to rise persistently, exacerbated by the global financial crisis and the COVID-19 pandemic, with expectations of further increases in the future. Particularly concerning is the growing expenditure on healthcare and aging, coupled with potential decreases in tax revenues if the Trump tax cuts are extended, further amplifying concerns over the federal debt. In response to these serious issues, the Hutchins Center at Brookings developed the “Fiscal Ship Game” to help the general public understand the urgency of federal debt and deficits.

The Fiscal Ship Game aims to stabilize debt and ensure the stable performance of essential government functions. Participants are encouraged to directly choose the most critical values of government roles and select policies that can achieve those values. However, policy choices must not only fulfill critical values but also reduce the debt-to-GDP ratio compared to current levels after 25 years. To enhance participants’ understanding of policies, each policy tab provides basic information and arguments for and against the policy. Winning the game involves selecting policies that achieve critical values while maintaining the debt-to-GDP ratio at current levels after 25 years. The game’s foundational data is based on standards from the Congressional Budget Office (CBO).

The Fiscal Ship Game is actively used as an educational resource in high schools and universities. The Hutchins Center provides teaching materials, including slides and videos, on its website for educators. Participants in the Fiscal Ship Game not only learn about the urgency of government debt and deficits but also become familiar with fiscal policy terms and naturally learn that policies commonly thought to contribute to reducing government debt may vary in actual effectiveness. As of 2016, the Fiscal Ship Game has been played over 1.7 million times and continues to spread across various educational and public engagement avenues.

ㅇCheol-In Lee (Professor of Economics, Seoul National University)

<“Rising National Debt and Fiscal Reform for Korea”>

In an era of low interest rates and globalization, both private and public sectors worldwide are seeing increasing debt levels. Globally, fiscal policies have deviated from traditional practices, with monetary expansion and increased fiscal spending occurring even when inflation is not a severe concern. South Korea’s expansive fiscal policies began before the COVID-19 pandemic, with increased tax revenues and expenditures. Unlike other countries that reverted to pre-COVID fiscal policies after the pandemic, South Korea has shown little discussion or change in its fiscal policies post-COVID.

South Korea has recorded a fiscal deficit of approximately -5% over the past six years, with low borrowing rates expanding liquidity despite the deficit. In the real estate market, efforts to stabilize property prices through taxation have coincided with liquidity expansion due to fiscal deficits, leading to asset bubbles. Rising welfare spending has become a major contributor to public debt growth, while issues such as the depletion of social insurance funds like the National Pension loom.

Even amid fiscal deficits, 40% of national finances in South Korea continue to be transferred to local governments. Despite significant budget allocations totaling 380 trillion KRW over the past 18 years, low birth rates persist, and social insurance reforms have yet to achieve success. South Korea remains highly dependent on central government funding for local governments, primarily allocating funds for operational rather than developmental purposes.

Addressing these challenges requires a new fiscal paradigm, possibly encompassing “fiscal federalism.” It necessitates a shift in how South Korea views its fiscal reality, focusing not just on national debt ratios but also on general accounting methods to accurately assess its fiscal state. Objective evaluation of funding sources supporting fiscal reforms is crucial, urging more proactive engagement towards fiscal reform.

ㅇChong-Bum Ahn(President of Policy Evaluation Research Institute, PERI) / Young Jun Chun (Professor of Hanyang University)

<“Introducing ‘PERI Budget Game as an Evidence-Based Policy Tool”>

The PERI Fiscal Ship Game adapts the “Fiscal Ship” game developed by the Hutchins Center for Fiscal & Monetary Policy at the Brookings Institution in the United States to apply it to the central government budget of South Korea. Participants in the game select multiple goals they aim to achieve and choose policy options to meet these goals, enabling them to instantly assess whether the policy objectives are achieved and whether constraints are satisfied. The Hutchins Center’s Fiscal Ship Game sets a constraint on the upper limit of national debt levels at the end of the game period. The PERI Fiscal Ship Game introduces an additional constraint by developing the PERI Young Index (PYI), which evaluates intergenerational fairness in net tax burdens alongside national debt levels. The PYI compares the net tax burdens across current and future generations surviving in the evaluation year. Policy choices must ensure that the PYI index comparing the net tax burdens between current and future generations does not increase due to the execution of selected policy options. Participants achieve victory in the game by successfully achieving policy objectives while satisfying constraints.

For example, assuming policy objectives such as “protection of the elderly,” “tax cuts,” and “investment for the future,” participants may choose policy tools such as enhancing income redistribution factors for national pension benefits and adjusting basic pension benefits to achieve elderly protection. For tax cuts, options may include reducing income taxes, corporate taxes, abolishing comprehensive real estate taxes, and inheritance and gift taxes. Investment for the future may involve raising corporate tax burdens to enhance higher education investments to OECD average levels and promote investment. For funding policy reforms, scenarios may include increasing value-added taxes, energy taxes, pension insurance rates, and adjusting education budget subsidies linked to school-age population numbers.

Policy reforms must manage national debt below a certain level and avoid worsening intergenerational inequality as a constraint. Results from the PERI Fiscal Ship Game highlight effective strategies such as strengthening income redistribution factors for national pension benefits to raise pension income levels for low-income groups. In terms of funding sources, potential for significant increases in value-added taxes is considerable, while adjusting local education budget subsidies linked to school-age population numbers effectively reduces government spending without reducing educational expenses per school-age population. Without adjustments to tax burdens and expenditure structures, there is a high likelihood that participants’ selected policy objectives may exceed the upper limit of national debt or fail to satisfy constraints by exacerbating intergenerational inequality.

The PERI Fiscal Ship Game holds potential for various applications, enhancing understanding of fiscal structures and risks among students and the general public in educational settings. It can also be utilized for cost estimates following legislative enactments and evaluating the fiscal sustainability of policies. Utilization in assessing whether national debt excessively increases and exacerbates intergenerational inequality in tax burdens due to policy implementation is feasible. Furthermore, comparing participant records (log files) of the Fiscal Ship Game in the United States and the PERI Fiscal Ship Game in South Korea enables comparative studies between the two countries, with plans to expand such national fiscal games to multiple countries.

DISCUSSION HIGHLIGHTS

<PERI, Policy Evaluation Research Institute>