The limited effect of the tax/benefit system on income inequality and poverty
Public social spending in Korea increased at a 12% annual rate in real terms between 1990 and 2007 - the fastest in the OECD area - boosting its share of GDP from 2.8% to 7.6%. However, the upward trend in social welfare spending has not prevented a deterioration in income distribution. Public social spending increased in the wake of the 2008 global financial crisis, as in other OECD countries (OECD, 2012c). Even in 2009, though, it was still the second lowest at 9.6% of GDP, well below the OECD average of 22%. As a result, government transfers accounted for only 2.7% of disposable income in Korea, the second lowest in the OECD area and well below the average of 12.3%, after accounting for taxes (OECD, 2011a).
Public social spending in Korea in 2009 was lower than the OECD average in each of the major areas (Figure 1.7):
- • Pensions: Korea’s spending of 2.1% of GDP was well below the OECD average of 7.3% due to the relatively recent introduction of the NPS, gaps in its coverage and Korea’s still relatively young population.
- • Income support to the working-age population: Korea’s outlays of 1.4% of GDP are far below the OECD average of 4.7%, reflecting the fact that support for families, such as child benefits and child care support, amounted to only 0.8% of GDP, the lowest in the OECD and well below the OECD average of 2.3%.
- • Health care: Korea’s low share of 4.0% of GDP reflects its relatively young population, the limited coverage of the NHI and high co-payment rates.
In addition to the relatively young population, the lower level of social spending also reflects Korea’s low unemployment rate and low level of per capita income. According to one study, after taking account of these factors, the gap in social spending between Korea and the OECD average narrows from 11.7 percentage points to 3.4 (Elekdag, 2012).
Besides its low levels, social spending is not well targeted, as only a quarter of total cash benefits from the government go to the poorest 20% of the population. The problem of poor targeting is partly due to blind spots in coverage, particularly among the self-employed and non-regular workers. Meanwhile, the tax burden in Korea is low - 25% of GDP compared to an OECD average of 34% in 2010 - and has little impact on income distribution because Korea is one of only a few countries that combines a relatively low tax burden with very little progressivity (Joumard et al., 2012). Consequently, only Chile and Mexico achieve less income redistribution than Korea through their tax and benefit systems. Moreover, it achieved the smallest reduction in the relative poverty rate among the working-age population in the OECD area, reducing it by just 1.2 percentage point relative to market incomes (from 13.4% to 12.2%). In contrast, the average relative poverty rate in the OECD area is halved from 20% to 10% after taking account of the tax and benefit systems.
Figure 1.7. The composition of public social spending in Korea compared with the OECD
- a) Includes also spending referring to “Housing”.
- b) Includes spending referring to “Active labour market programmes” and “Unemployment”.
- c) Includes spending referring to “Incapacity related” and “Family”.
- d) Weighted average of the 34 OECD countries.
Source: OECD Social Expenditure Database (www.oecd.org/els/social/expenditure).