Study of Mid-to-Long-Term Fiscal Projection Methods Related to Discretionary Spending

Published on September 21, 2023
Published by Estimates & Tax Coordination Division

    First, this study focuses on analyzing the past trends, category- and sector-specific status, and current projection methods regarding discretionary spending that constitutes approximately 50% of total government spending in Korea. Starting with 2012, Korea’s government spending can be broken down into discretionary spending and mandatory spending. The former is observed to have risen from KRW 170.0 trillion in 2012 to KRW 338.1 trillion in 2022, recording an average annual growth of 7.1% during the period 2012-2022. Most mid-to-long-term fiscal projections related to discretionary spending in Korea and beyond are based on total spending regardless of category and sector under the presumption that it would increase in proportion to GDP valued at current prices. Some projections were found to have further segmented spending types and taken demographic variables into account to keep up with demographic changes.
   Second, this study employed a systematic step-by-step process to examine the limitations of discretionary spending projections, seek improvement measures for the identified limitations, and offer an optimal projection model. To this end, projection targets were screened in consideration of the uncertainty of the scale of discretionary spending, while a time-series projection model known as the autoregressive distributed lag – error correction model (ARDL-ECM) was selected through rigorous research and testing. The periods of economic crisis, changes in the government’s policy orientation, etc., were utilized as control variables to reduce errors in projection results. Furthermore, 2007-2011 datasets were additionally established for the screened projection targets to supplement the existing data that was marked by interrupted and short time series.
   Third, this study provides a projection for the categories of personnel expenses, employment and labor, children and youth, and environment on a pilot basisin consideration of the scale of discretionary spending and the impact of demographic variables as a decisive factor. The results indicate that, contrary to the existing projections, the ratios of GDP valued at current prices to discretionary spending for individual projection targets do not remain consistent. Rather, they increase (personnel expenses, employment and labor, and environment) or decrease (children and youth) due to projected income levels and demographic changes. The results imply that further segmentation of the categories subject to projection is required, at least for some of the categories, as demographic changes, etc., exert a noticeable impact on the scale of spending.
   However, this study has limitations in that the methods and results specified are applicable to only a limited number of categories and that it failed to propose models and variables that work for all discretionary spending. As the projection provided in this study is based on the main budget for 2023, it should be noted that this study does not reflect the discretionary spending plan aligned with the government’s policy orientation or policy directions from 2024 onward.