BOK report shows gov’t spending helps economy

The impact of government spending on economic performance has long been a divisive topic with a number of researches and papers suggesting contrasting results.

According to Korea’s central bank on Monday, an increase in government spending has a positive effect by expanding GDP by 1.27 times.

This means when the government adds 1 trillion won ($845 billion) to its budget, its effect on GDP translates to 1.27 trillion won.

In the report, dubbed “Identifying Government Spending Shocks and Multipliers in Korea,” the Bank of Korea (BOK) investigated the so-called multiplier effect of an expanded government spending including supplementary budgets between 2000 and 2018 using new methodology.

“The study confirmed that increasing in government spending is significant in boosting GDP” said Park Kwang-yong, a researcher at the BOK’s Economic Research Institute.

“The result indicates that fiscal policy is a viable measure to stimulate the economy, given that it can reduce economic fluctuations using the financial resources reserved for the future,” Park said.

To accurately assess the effect, the research tracked data from right after the news of additional government spending is released, not the time of implementation, since corporations tend to adjust their spending decisions based on the announcement.

Using the new timeframe, the so-called multiplier effect of government spending increased compared to previous reports.

“The research was able to factor in the increased spending in the private sector made after the announcement of further government spending, a factor that was missed in previous research,” the report said.

It also found that the impact on GDP hit a peak four quarters after the budget announcement, though the positive effect continues for more than five years.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]