Edited by Duck-Koo Chung and Barry Eichengreen
Chapter 6: The fiscal policy response to the crisis
6. The ﬁscal policy response to the crisis Joosung Jun INTRODUCTION Fiscal conservatism has long been a touchstone of Korean macroeconomic policy. From this point of view the 1997–98 crisis was a major shock. When the crisis hit, the International Monetary Fund called on Korea to maintain its traditional conservative ﬁscal stance. A tighter ﬁscal policy, it argued, would facilitate macroeconomic adjustment, allow for the ﬁnancing of restructuring, and help to restore investor conﬁdence. Once the magnitude of the crisis became known, however, ﬁscal conservatism was abandoned in favor of a more activist stance with the goal of boosting economic activity and strengthening the social safety net. In 1998, the budget deﬁcit reached 4.2 percent of GDP, reﬂecting declining tax revenue and the expansion of spending during the post-crisis recession. At the time, doubts about the speed and vigor of recovery led the authorities to conclude that an expansionary ﬁscal policy would have to be maintained for some years. Since late 1998, however, Korea has staged an impressive comeback, with macroeconomic fundamentals improving markedly. With recovery well underway, in 2000 the ﬁscal authorities shifted toward medium-term consolidation with the goal of restoring ﬁscal balance by 2003. Their efforts were even more successful than they imagined, as by 2000 the country had already achieved a surplus of 1.3 percent of GDP. This chapter examines these developments and reﬂects on the appropriateness of the ﬁscal policy during and after the crisis. No discussion of the ﬁscal response...
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