Jongseok An Korea Institute of Public Finance
01 02 03 04 Long-term Fiscal Projection in Korea Projection of Social Expenditures Projection of Tax Revenue Discussions on Tax Policy 2
In 2011, MOSF formed Long-term Fiscal Projection Task Force Long-term fiscal projection, every 5 years Time span : more than 40 years Legal background : National Finance Act The MOSF should report the result to National Assembly The MOSF announced the first result in 2015 3
Long-Term Fiscal Projection Task Force KIPF, Center for Long-Term Fiscal Projections Macro-economic indicators (incl. population) Tax revenue Nat l pension Health insurance Gov t employees pension Private teachers pension Military pension Unemployment and other insurances Other social Exp. NSO, KDI KIPF MOHW, NPS MOHW, NHIC MPM, GEPS MOE, Teachers Pension MOD, KIDA MOEL, Kcomwel, KIPF SSC 4
1) Premises of projection (population, growth rate) KDI, NSO etc 2) The projection affected by changes in trend (mandated expenditure, incomes etc) 9 agencies and KIPF * NSO, KDI, NPS, NHIC, GEPS, Teachers pension, KIDA, Kcomwel, SSC 3) Determined by government s policy decisions ( discretionary expenditures) Two scenarios: GDP growth rate or fiscal consolidations scenarios 4) Long-term fiscal projections Estimation of factors affecting the fiscal deficit directly (general gov t) Fiscal balance, national debt Separate portion operated by the beneficiary payment principal Prognosis the sustainability of each social insurance 5) Sensitivity analysis: In case of additional changes in the basic scenario + 5
Population KOSTAT s future population estimation Working population : peak in 2016 Total population : peak in 2030 Macroeconomic premises KDI forecasts macroeconomic variables The annual GDP growth rate 3.6% during 2020~30, 2.6% in 2030~40, 1.4% in 2040~50 6
Year Total Social insurance General government expenditure, etc. (A+B) (A) Sub-total (B) Basic senior pension Subsidies for low income class, disabled, childcare, etc. Other 2015 10.7 6.9 3.7 0.7 1.6 1.4 2020 12.3 8.5 3.8 0.7 1.7 1.4 2025 14.2 10.3 3.9 0.8 1.7 1.4 2030 16.2 12.2 4.0 0.9 1.7 1.4 2035 18.2 14.2 4.0 1.0 1.7 1.4 2040 20.4 16.4 4.0 1.0 1.6 1.4 2045 22.5 18.6 4.0 0.9 1.6 1.4 2050 24.4 20.5 4.0 0.9 1.6 1.5 2055 25.8 21.8 3.9 0.8 1.6 1.5 2060 26.8 22.8 4.0 0.8 1.6 1.6 Note: 1) Old series of GDP(2005 Series) Source: The Centre for Long-term Fiscal Projections, KIPF 7
Year Total NP GEP TP MP NHI LCIA UI OHSI 2015 6.9 1.2 0.9 0.2 0.2 3.3 0.3 0.5 0.3 2020 8.5 1.8 0.9 0.2 0.2 4.2 0.3 0.5 0.3 2025 10.3 2.3 1.1 0.2 0.2 5.2 0.4 0.5 0.4 2030 12.2 3.0 1.2 0.3 0.2 6.3 0.5 0.5 0.4 2035 14.2 3.8 1.1 0.3 0.2 7.3 0.6 0.5 0.4 2040 16.4 4.9 1.1 0.3 0.2 8.3 0.7 0.5 0.4 2045 18.6 5.9 1.1 0.3 0.2 9.3 0.9 0.5 0.4 2050 20.5 6.9 1.2 0.3 0.2 10.1 1.0 0.4 0.3 2055 21.8 7.5 1.2 0.3 0.2 10.8 1.1 0.4 0.3 2060 22.8 8.2 1.2 0.4 0.2 11.0 1.1 0.4 0.3 Note: 1) Old series of GDP(2005 Series) NP: National Pension, GEP: Government Employees Pension, TP: Teachers Pension, NHI: National Health Insurance, LCIA: Long-term care insurance for the aged, UI: Unemployment Insurance, OHSI: Occupational Health and Safety Insurance Source: The Centre for Long-term Fiscal Projections, KIPF 8
The new government in Korea has many plans toward a more generous welfare system National Health Insurance : more services to be covered, lower co-payment ratio for some services, lower personal expense limit A new child allowance : 100 thousand won per child up to 5 years old, 2.7 trillion won/year, 0.2% of GDP in 2016 Basic Senior Pension : raised monthly payment by 100 thousand won (from 200 thousand won to 300 thousand won), 16.4 trillion won/year, 1% of GDP 9
The Center for Long-term Fiscal Projections at KIPF made projections for tax burden ratios Personal income tax, corporate tax, VAT : use its own models for each tax items Property taxes and local taxes : assume that their revenue to GDP ratios remain unchanged 10
Year Tax burden ratio (excl. SSC) Social security contribution ratio Total tax burden ratio (incl. SSC) 2015 19.49 7.08 26.57 2020 19.25 8.01 27.26 2025 19.31 8.52 27.83 2030 19.44 8.70 28.14 2035 19.58 8.74 28.32 2040 19.74 8.71 28.45 2045 19.89 8.65 28.54 2050 20.00 8.62 28.62 2055 20.06 8.44 28.50 2060 20.13 8.26 28.39 Note: Old series of GDP(2005 Series) Source: The Centre for Long-term Fiscal Projections at the KIPF 11
Total burden ratio for fiscal sustainability Projection of total burden ratio Fiscal deficiency Gen. Acc. (A) Social insurance (B) Total Exp. (C=A+B) Tax burden (A*) Total tax burden (C*) Tax burden (A-A*) Total tax burden (C-C*) 2015 17.9 6.5 24.5 17.9 24.5 0.0 0.0 2020 18.0 8.0 26.0 17.7 25.1 0.3 0.9 2025 18.1 9.6 27.8 17.8 25.6 0.3 2.2 2030 18.2 11.4 29.6 17.9 25.9 0.3 3.7 2035 18.2 13.2 31.5 18.0 26.1 0.2 5.4 2040 18.2 15.3 33.5 18.2 26.2 0.0 7.3 2045 18.2 17.3 35.5 18.3 26.3-0.1 9.2 2050 18.2 19.0 37.3 18.4 26.3-0.2 10.9 2055 18.1 20.2 38.4 18.5 26.2-0.3 12.1 2060 18.2 21.2 39.4 18.5 26.1-0.3 13.2 Note: Using the new series of GDP (2010 Series) 12
Tax burden ratio 5.3% in 1953 17.9% in 2013 Total tax burden ratio (incl. SSC) 24.3% in 2013 Recent changes in tax burden ratios 2011 2012 2013 2014 2015 2016 Tax burden/ GDP 18.4 18.7 17.9 18.0 18.5 19.4 SSC/GDP 5.7 6.1 6.4 6.6 6.7 Total Burden/ GDP 24.1 24.8 24.3 24.6 25.2 13
The factors caused the increase in tax revenue in the past Establishment of NTA and the improvements in tax administration Economic growth Improvement of tax system: introduction of VAT, comprehensive income tax system, etc Active use of ICT in tax administration Introduction and expansion of social insurance system Those factors do not seem to be effective in the future 14
First, to reduce expenditure of government and social insurances The projected total burden ratio required to keep fiscal sustainability is 39.4% in 2060 24.5% in 2015 The total burden ratio should be increased by 0.2-0.4%p annually The ratio increased by 0.3%p annually during the last 40 years 15
Second, to clarify the roles and responsibilities of social insurance system and general government Most of the budget risks are from social insurances The social insurances are operated on a self-paying bases currently with only a small amount of government support There are strong arguments for increases in government support for social insurances The social insurances should be reformed first, (or at least simultaneously with the tax system) Thenwe haveto drawpublicconsensuson the roleof government in financing social insurances 16
Third, generality vs specificity We have to consider not only the beneficiaries of welfare system but also those who pay for For this purpose, an increase in tax burden of most taxpayers seems to be better than an increase in tax burden of a small group of taxpayers (those with the highest income) Corporations are not appropriate as agents who pay for welfare cost a corporation does not have a voting right 17
Evaluation of major tax items in terms of efficiency, equity, adequacy, and generality Personal Income Tax VAT Corporate Tax Efficiency ( ) 2) Equity - Adequacy Generality ( ) 2) Note: 1) good, average, bad, - difficult to evaluate 2) for income tax applied only on higher income group SSC 18
Current status of these taxes ETRs of PIT are relatively low for all income classes VAT rate : 10% - lower than many other countries with VAT CT rate : top rate (25% in 2018) is in the middle of top CT rates of OECD countries The government proposed changes in CT and PIT To raise CT rate for very large corporations, and to raise PIT rate for the highest income class These changes seem to have limited effects on revenue and income redistribution 19
Tax Items 2010-2015- 2021-2031- 2014-2051- 14 20 30 40 50 60 Income Taxes 26.7 26.9 26.6 27.5 28.7 29.5 PIT 13.6 15.3 14.8 14.9 15.3 15.6 CT 13.1 11.6 11.7 12.6 13.3 13.9 Social Security 24.8 27.1 30.6 30.8 30.3 29.5 Consumption Taxes 27.2 24.3 22.6 21.7 21.2 21.1 VAT 16.2 14.5 13.8 13.6 13.6 13.6 Specific 11.0 9.9 8.8 8.1 7.7 7.5 Taxes on Property 5.1 4.3 4.0 4.0 3.9 3.9 Local tax 16.3 17.3 16.2 16.0 15.9 15.9 Total Tax 100.0 100.0 100.0 100.0 100.0 100.0 Source: The Centre for Long-term Fiscal Projections at the KIPF 20