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2003 OECD Economic Surveys: Korea 2003

image of OECD Economic Surveys: Korea 2003

This 2003 edition of OECD's periodic review of Korea's economy  examines recent economic developments, policies and prospects and includes special features on reforming the public expenditure system and structural reform.

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Reforming the Public Expenditure System

Korea has a history of fiscal prudence, reflected in relatively small budget deficits and low public debt. In gross terms, public debt is around 22 per cent of GDP, ranking well below the average of 74 per cent in the OECD area. Korea also has one of the lowest ratios of government spending to GDP (Figure 23). The level of public spending also reflects the immaturity of the social welfare system as well as the relatively low level of public services. However, Korea’s public finances are facing serious pressures for increased spending. First, population ageing is projected to be exceptionally rapid in Korea, boosting the demand for greater spending on pensions and health. Second, the state-provided social safety net will expand as Korea moves away from traditional family-provided social protection. Third, Korea needs to prepare for the cost of co-operation with the North and eventual reunification. Meeting these challenges will require dealing with structural shortcomings of the budgeting and public expenditure management system. While the public expenditure system has been successful in maintaining aggregate fiscal discipline, it is not geared toward attaining efficient allocation of resources and maximising value for money. Furthermore, maintaining fiscal discipline through the traditional budgetary tools will be increasingly difficult, given the spending pressures that will significantly increase the share of non-discretionary spending in the government budget.

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