Addressing fiscal uncertainty: Proposing policy pathways for enhancing economic growth and fertility rates in South Korea

Abstract

This study investigates the critical role of fiscal uncertainty in driving economic growth in South Korea and explores the potential implications for the nation's long-standing low fertility challenge. Utilizing country-year data and advanced measures disaggregating economic policy uncertainty into dimensions like fiscal, monetary, and trade uncertainty, the analysis reveals a strong negative association between fiscal uncertainty and GDP growth rates over the past three decades. Periods of heightened fiscal volatility, characterized by unpredictable government spending, tax policies, and overall economic instability, consistently preceded declines in economic growth. Moreover, the findings indicate that fiscal uncertainty moderates the relationship between economic expansion and fertility rates. While GDP growth generally improves conditions favorable for childbearing by raising living standards, the positive impact on fertility diminishes as fiscal uncertainty increases. Strikingly, at sufficiently high levels of uncertainty, economic growth fails to boost fertility rates, underscoring the crucial role of fiscal stability in reaping the full benefits of growth. These insights highlight the importance of reducing fiscal uncertainty through strategies like implementing tax and spending "calendarization" systems and adopting long-term policy planning horizons. By promoting fiscal predictability and fostering an environment conducive to sustained economic expansion, policymakers can indirectly create conditions that support higher fertility rates by alleviating household aversion to uncertainty. While focused on economic factors, this research acknowledges the multifaceted nature of fertility decisions and calls for a holistic policy approach combined with further causal investigations using micro-level data and experimental designs. Ultimately, prioritizing fiscal stability and addressing fiscal uncertainty present a critical pathway towards stimulating economic growth and potentially revitalizing fertility rates in South Korea and similar developed nations confronting demographic challenges.