Abstract
Korea currently has a sound fiscal position and a relatively low level of public spending. Given the impact of rapid population ageing on public expenditures in the long run and the potential cost of economic integration with North Korea, it is important to maintain a strong financial position. Slowing the growth of public outlays from its 9% pace since 2002 would help achieve the target of a balanced budget in the medium term. Reforming the tax system is necessary to generate additional revenue and to remove the cost of distortions as tax rates rise to cope with spending pressure. The personal income tax system should be improved by reducing generous exemptions and allowances that exclude more than half of wage income from the tax system. In addition, the corporate income tax base should be broadened by eliminating incentives that distort the allocation of investment and complicate tax administration.
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