A Study on the Effectiveness of Inter-temporal Reallocation of Fiscal Expenditure in Korea

Now that fiscal soundness is increasingly important influenced by the euro area fiscal crisis, early budget execution has been under the spotlight as a tool for economy control, other than typical expansionary method, such as supplementary budget. Basically, early budget execution is a fiscal policy instrument that reponses to economic fluctuations through modifying the inter-temporal allocation of fiscal expenditure within budget, without affecting fiscal soundness. This study empirically examines how effective the inter- temporal reallocation of fiscal expenditure is in economy control. Using Korea’s Consolidated Fiscal data, the size of inter-temporal reallocation of fiscal expenditure is defined as changes of fiscal expenditure for one year excluding seasonal factors and used to explain real economic growth rate, a dependent variable. The result shows that the macroeconomic effect of the inter-temporal reallocation turns out meaningful in general, though some policy time lag exists. Meanwhile, a simulation using macroeconomic model finds that overall effect on economic growth is not large because increase in fiscal expenditure allocation at a certain point of time is canceled by the opposite direction within the same fiscal year. However, the inter-temporal reallocation is found to reduce volatility of key macroeconomic variables so as to contribute to partially stabilizing macroeconomy. In particular, such effect of economic stabilization seems to be highly apparent at the time of financial crisis, but not very noticeable in normal economic cycle