Lessons for Korea from Japan’s fiscal policy

SeongTae Kim investigates Japan’s experiences since the 1990s to find lessons for Korea’s future fiscal policy. Japan’s deteriorating fiscal soundness is attributed to the decline in revenue (from tax cuts, recession and deflation) and increases in expenditure (largely for social welfare, local tax grants and public works, exacerbated by weakness in the legislative-executive checks-and-balances system). By contrast, Korea in the 2010s is in better fiscal shape than Japan was in the early 1990s, with a much lower debt-to-GDP ratio, structural balances still positive, a slower growth-rate decline, more stability in its tax-burden ratios and a better checks-and-balances system, although the share of non-age-related central government expenditure is still far larger in Korea than the OECD average. To ensure longer-term fiscal soundness and not repeat Japan’s experiences, comprehensive reform of fiscal policy is inevitable, with special attention to the tax base and social welfare expenditure in an aging society.