Chapter 6: The fiscal policy response to the crisis
Fiscal policy was transformed by the crisis that erupted in 1997, as Korea’s long-standing ﬁscal conservativism gave way to a more activist approach in response to economic weakness and soaring unemployment. This section reviews major developments in this period. Shifts in the Fiscal Stance Korea has long pursued a conservative ﬁscal policy. Spending commitments have typically been limited to anticipated revenues. Consequently, budget deﬁcits were not a major problem in the period leading up to the crisis. The consolidated central government budget had remained more or less in balance throughout the period 1990–97 (Figure 6.1).2 Because ﬁscal policy was not used as an instrument of demand management, the cyclically adjusted ﬁscal balance did not deviate much from the ﬁnancial measure.3 The gap between the primary and conventional balances was slight because the public debt was small and interest payments accounted for only a small share of the budget. The government’s strong ﬁnancial position reﬂected ﬁscal consolidation efforts undertaken in the 1980s. The government had run deﬁcits in the 1970s, reﬂecting its active support for investment in the heavy and chemical industries and transfers to the agricultural sector. In the early 1980s it then 116 The Korean economy beyond the crisis 3 2 Share of GDP 1 0 –1 –2 –3 –4 –5 Financial balance Structural balance Primary balance 78 79 8081 828384 858687 888990 919293 949596 979899 00 Year Note: The structural balance is estimated according to IMF methodology. Source: Author’s calculation based on...
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