[2018-8] Calculation of Fiscal Impact Measure for Korea

Macro Economy
Fiscal Impact Measure Government fiscal policy Economic fluctuations Tax revenue Fiscal expenditure
Research department (02-759-4172)

Government fiscal policy have huge impacts on economic fluctuations and growth. As a result, enhancing the accuracy of economic outlooks requires an accurate understanding of the effects of government fiscal policy on economy.

Many indicators are being developed to help understand government fiscal policy. The indicators currently in use, however, were developed in an attempt to examine fiscal soundness and therefore shed little light on how fiscal policy affect economy. Even the indicators that reflect the effects of fiscal policy only do so partially and thus are of limited utility in assessing the overall impacts. This paper introduces and calculates a Fiscal Impact Measure (FIM) and analyzes its characteristics to suggest ways to comprehensively analyze the effects of fiscal policy on economy. The FIM considers the effects of tax revenue and fiscal expenditure simultaneously to enable users to comprehensively analyze the effects of fiscal policy on economic fluctuations. The FIM is also transparent, timely, and easy to calculate. Although it provides information qualitatively similar to that offered by fiscal accounts, the FIM is useful given that it also indicates the degree to which government fiscal policy affect the GDP growth rate.

After calculating the FIM using Korean data, it is found to reflect government fiscal policy well, accurately capturing changes in policies regarding tax revenue and fiscal expenditure. The FIM also points to the overall counter-cyclicality of the Korean government’s fiscal policy. Korea’s fiscal policy curbed aggregate demand overall during the economic expansion of the late 2000s, and helped expand aggregate demand during the economic slump following the global financial crisis. Since 2010 the Korean government has maintained an overall neutral fiscal stance, switching between slight tightening and easing.

The characteristics of the FIM should be taken into account when it is interpreted and used. The FIM is an indicator that helps users understand how the government’s fiscal activities affect growth and thereby ease economic fluctuations, and it is not intended for an overall evaluation of the government’s role. Another limitation is the FIM’s uncertainty as an indicator in that it is calculated using estimates such as revenue and expenditure multipliers.

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