"South Korea Ranks 2nd in OECD for Rising Government Consumption Share... Concerns Over Accumulating National Debt"

18.4% in the First Half of This Year, Exceeding Optimal Levels for Growth and Unemployment

[Asia Economy Reporter Dongwoo Lee] From 2010 to 2018, South Korea had the second fastest increase in the share of government consumption in Gross Domestic Product (GDP) among OECD countries.

Since the share of government consumption is related to controlling growth rates and unemployment rates, there are calls to establish a system to regulate it in order to prevent fiscal deficits and the accumulation of national debt.

The Korea Economic Research Institute (KERI) announced on the 16th that according to its analysis titled "Estimation and Implications of Government Consumption Share for Maximizing Growth Rate and Minimizing Unemployment Rate," the increase in South Korea's government consumption share in 2018 rose by 1.4 percentage points compared to 2010.

This was the second highest increase among 37 OECD countries, following Colombia (1.8 percentage points increase), with only seven countries, including South Korea, experiencing an increase in government consumption share. Meanwhile, the remaining 30 countries saw a decrease in their government consumption share.

In Ireland, which succeeded in high growth by creating a business-friendly environment, the government consumption share decreased by 5.8 percentage points. Lithuania (-4.7 percentage points), Iceland (-4.1 percentage points), and the United States (-3.0 percentage points) followed.

Exceeding Appropriate Level of Government Consumption Share Leads to Low Growth and Increased Unemployment

KERI expressed concerns that exceeding the appropriate level of government consumption share could lead to low growth and increased unemployment.

Based on an analysis of 35 OECD countries from 2012 to 2018, KERI estimated that the government consumption share that maximizes GDP growth rate is 15.6%, and the share that minimizes unemployment rate is 18.3%.

South Korea’s government consumption share has been on the rise over the past three years, reaching 15.8% in 2018, 16.5% in 2019, and 18.4% in the first half of this year, already surpassing the growth-maximizing level and approaching the unemployment-minimizing level, KERI explained.

KERI warned that exceeding the appropriate level of government consumption share could worsen the fiscal balance ratio and contribute to the accumulation of national debt. It pointed out the need to legislate principles such as expenditure within revenue and limits on total government personnel, as well as to strengthen parliamentary review of government budgets, considering cases where the government consumption share exceeds the appropriate level.

Choo Kwang-ho, Director of Economic Policy at KERI, said, “While most countries are reducing their government consumption share, South Korea’s rapid increase is concerning,” and added, “It is necessary to consider introducing a system that can control government consumption expansion.”