The Korean Economic Review
An Empirical Evaluation of Fiscal Sustainability Near and Far
Joonhyuk SongYear 2009Vol. 25No. 1
This paper investigates both fiscal sustainability of the past and the effect of welfare spending on the future fiscal soundness. In theoretical angle, fiscal sustainability is defined by largely two conditions: No-Ponzi Game condition and debt ratio against GDP converge toward equilibrium. Empirical evidence suggests that Korea’s finance has been maintained in a sustainable way in light of both conditions. Also, we find that near- and medium-term fiscal soundness will not be disturbed by social spending,induced by population ageing, due to huge reserves and surpluses produced by the national pension. However, as the pension surpluses draw to an end by 2047, debt-to-GDP ratio will reverse its course to an increasing trend, inflicting longer-term fiscal sustainability.