A study has found that for every won the government spends, the gross domestic product (GDP) increases by 1.45 won. This research is noteworthy as it allows for the assessment of the appropriate scale of the supplementary budget and its economic stimulus effects.
According to the Bank of Korea on the 13th, Professor Heo Jun-young from Sogang University and doctoral student Kim Se-hoon recently published a paper titled "Analysis of the GDP Effect of Government Expenditure" in the Bank's quarterly academic journal "Economic Analysis."
In the paper, the research team estimated the government expenditure multiplier, which reflects the impact of government expenditure on GDP, based on time series data from the first quarter of 2002 to the fourth quarter of 2023.
As a result, the government expenditure multiplier for South Korea was calculated to be 1.45. This means that when government expenditure increases by 1 won, the current GDP increases by 1.45 won. Even narrowing the analysis period to the fourth quarter of 2019, prior to the COVID-19 pandemic, it still appeared at 1.23.
The research team noted, "Government expenditure is at least an effective measure to respond to economic fluctuations in the short term," while adding, "However, in the medium to long term, an increase in government expenditure could lead to a rise in Government Bonds interest rates, which may in turn contract the economy, so potential side effects should be considered."
Based on the research team's estimates, a simple calculation suggests that if a supplementary budget of 10 trillion won is implemented, the GDP growth rate for this year will increase by approximately 0.5 percentage points. This figure is derived from the quarterly year-on-year growth rate forecasts the Bank of Korea provided in February (first quarter 0.2%, second quarter 1.3%, third quarter 2.0%, fourth quarter 2.3%).
However, there are prior studies that see the government expenditure multiplier as being below 1. It is reported that the multiplier estimated by the Bank of Korea is also lower than 1.45. Bank of Korea Governor Lee Chang-yong stated in February at the National Assembly, "If the supplementary budget is around 15 trillion to 20 trillion won, it would have the effect of raising the growth rate by 0.2 percentage points."
Meanwhile, Deputy Prime Minister and Minister of Economy and Finance Choi Sang-mok stated on the 8th, "Next week, I will announce a supplementary budget proposal worth 10 trillion won." This proposal is expected to include measures for ▲ enhancing competitiveness in trade and artificial intelligence (AI) ▲ supporting livelihoods ▲ disaster response projects.