Fiscal Performance, Public Debt and Fiscal Consolidation in Korea

As for the East Asian countries, the total amount of government debt in Korea has risen sharply over the following several years in the wake of the Asian financial crisis. The purpose of this paper is to assess whether the current levels of government debt are sustainable for a severely attacked country, namely, Korea. Under the intertemporal budget constraint model, the study tests for fiscal sustainability and examines whether there was any discernible change in the behaviour of government debt following the Asian financial crisis. Empirical analysis indicates that the levels of government debt are not sustainable in Korea. It also shows that the crisis contributes significantly to push the government debt in excess of its sustainable level. This urges policy attention for fiscal consolidation.