Korea’s welfare budget had shown a steady increase and it finally exceeded KRW 100 in 2014. But still, there are different voices around whether our welfare spending is at an appropriate level or not. Against this backdrop, this report intends to take stock of our social welfare spending from an objective point of view and derive some suggestions for future management of our welfare budget. Given the concern that the increasing welfare spending may undermine the fiscal stability of the government, it is important to analyze the relationship between fiscal soundness, welfare spending and tax burden and determine whether Korea still has room to spend more on social welfare. The key findings and conclusions are highlighted below.
First, the report analyzed how much Korea is actually spending for social welfare compared to other OECD member countries. For a comparative analysis, it calculated and used an “index for international expenditure comparison for welfare” which takes into account socio-economic differences of individual countries. The index is computed by multiplying the ratio of the “actual value” versus the “reference value” (or the fitted value which is estimated through the regression analysis) by 100.
Under this methodology, which calculated the index based on “public” spending on social welfare, Korea was indexed at 65.5. Since this value is lower than 100, it is fair to say that Korea spends less on social welfare than other OCED countries in relative terms. Out of all OECD members, 15 countries fell below the 100 mark with Korea being the lowest.
The reason why Korea ranked low in the index can be found in our unique circumstances (except those reflected in the index calculation as socio-economic factors) as follows: ① our public pension scheme has not matured enough; ② Korea maintained a growth-oriented policy stance for a long period of time; and ③ our society has not reached consensus on the increased spending on social welfare.
The report also analyzed the tax burden borne by the Korean people. Using the same methodology, an “index for international expenditure comparison for tax burden” was calculated and Korea was indexed at 78.4 as of 2011. As it is below 100, we can say that our people are less burdened compared to the people of other OECD countries. Out of all OECD members, 16 countries came below 100 with Korea being the third lowest.
The reason why our tax burden is relatively low is also because we have our own unique circumstances mentioned above. These circumstances played a role in reducing tax burden on our people. .
Lastly, the report analyzed the relationships between public spending on social welfare, tax burden and fiscal stability. Korea’s consolidated fiscal balance as % of GDP posted 2.0% in 2011, which was higher than the OECD average of -3.1. But when comparing the consolidated fiscal balances as % of GDP of OECD countries, it is necessary to consider each country’s unique circumstances like how well the public pension scheme is developed. To assess the impact of each country’s unique circumstances on the numbers, the report used a panel data model for the comparison of fiscal soundness of OECD member countries.
The reference level (-1.2%) for the “consolidated fiscal balance as % of GDP” derived from this model was lower than the actual ratio (2.0%) and was quite similar to the “national operational budget balance” (-1.4%). In other words, even when adjusted for the maturity level of our public pension scheme, Korea is analyzed to be in a better fiscal shape than other OECD countries. It should be noted that the positive gap observed in the “consolidated fiscal balance” is largely attributable to the surplus earned on social insurance funds. But given the rapid aging of our society, this positive gap in our fiscal balance is not likely to remain for a long time.
As analyzed above, Korea has a lower level of welfare spending and tax burden, but a higher level of fiscal stability than other OECD countries because of unique circumstances, including the fact that our public pension scheme has not matured enough. However, since our rapidly aging population and low birth rate are likely to increase welfare spending and decrease tax revenues, compromising the consolidated fiscal balance, efforts should be made in various aspects to maintain fiscal stability. For example, a reasonable adjustment to the tax burden to deal with the growing welfare spending would go a long way in improving the consolidated fiscal balance. Other than this method, the government should make various efforts to fund the increasing welfare spending.
First, the report analyzed how much Korea is actually spending for social welfare compared to other OECD member countries. For a comparative analysis, it calculated and used an “index for international expenditure comparison for welfare” which takes into account socio-economic differences of individual countries. The index is computed by multiplying the ratio of the “actual value” versus the “reference value” (or the fitted value which is estimated through the regression analysis) by 100.
Under this methodology, which calculated the index based on “public” spending on social welfare, Korea was indexed at 65.5. Since this value is lower than 100, it is fair to say that Korea spends less on social welfare than other OCED countries in relative terms. Out of all OECD members, 15 countries fell below the 100 mark with Korea being the lowest.
The reason why Korea ranked low in the index can be found in our unique circumstances (except those reflected in the index calculation as socio-economic factors) as follows: ① our public pension scheme has not matured enough; ② Korea maintained a growth-oriented policy stance for a long period of time; and ③ our society has not reached consensus on the increased spending on social welfare.
The report also analyzed the tax burden borne by the Korean people. Using the same methodology, an “index for international expenditure comparison for tax burden” was calculated and Korea was indexed at 78.4 as of 2011. As it is below 100, we can say that our people are less burdened compared to the people of other OECD countries. Out of all OECD members, 16 countries came below 100 with Korea being the third lowest.
The reason why our tax burden is relatively low is also because we have our own unique circumstances mentioned above. These circumstances played a role in reducing tax burden on our people. .
Lastly, the report analyzed the relationships between public spending on social welfare, tax burden and fiscal stability. Korea’s consolidated fiscal balance as % of GDP posted 2.0% in 2011, which was higher than the OECD average of -3.1. But when comparing the consolidated fiscal balances as % of GDP of OECD countries, it is necessary to consider each country’s unique circumstances like how well the public pension scheme is developed. To assess the impact of each country’s unique circumstances on the numbers, the report used a panel data model for the comparison of fiscal soundness of OECD member countries.
The reference level (-1.2%) for the “consolidated fiscal balance as % of GDP” derived from this model was lower than the actual ratio (2.0%) and was quite similar to the “national operational budget balance” (-1.4%). In other words, even when adjusted for the maturity level of our public pension scheme, Korea is analyzed to be in a better fiscal shape than other OECD countries. It should be noted that the positive gap observed in the “consolidated fiscal balance” is largely attributable to the surplus earned on social insurance funds. But given the rapid aging of our society, this positive gap in our fiscal balance is not likely to remain for a long time.
As analyzed above, Korea has a lower level of welfare spending and tax burden, but a higher level of fiscal stability than other OECD countries because of unique circumstances, including the fact that our public pension scheme has not matured enough. However, since our rapidly aging population and low birth rate are likely to increase welfare spending and decrease tax revenues, compromising the consolidated fiscal balance, efforts should be made in various aspects to maintain fiscal stability. For example, a reasonable adjustment to the tax burden to deal with the growing welfare spending would go a long way in improving the consolidated fiscal balance. Other than this method, the government should make various efforts to fund the increasing welfare spending.