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Management Report

Management reports, briefs issued by Samsung Economic Research Institute

Measuring the Real Size of Government

Measuring the Real Size of Government

LEE Dong-Won

Feb. 5, 2007

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A government intervenes in the private sector through the means of fiscal spending and regulatory fiats. Fiscal spending provides public goods and service, while the laws and regulations influence private decision making in a myriad of ways. Although government intervention can help the economy run more efficiently by fixing the problems of market failure, excessive public expenditure and regulations hamper economic growth. For example, fiscal spending leads to an increase in tax burden and government debt, while heavy regulations discourage economic activities.

Fiscal spending is the conventional benchmark used to assess the impact of government on the overall economy. Regulation, however, also influences the economy by raising the cost of economic activities. Without properly accounting for the regulation, fiscal spending significantly underestimates the level of government intervention. Thus, a measure of the size of real government must include the regulatory side of government as well as fiscal spending.

The Korean government's fiscal spending has grown since the 1997 financial crisis, particularly in the areas of welfare spending and national development. General government outlays accounted for 29.4% of Korea's GDP between 2003 and 2006, up 7.9 percentage points from the 21.5% of GDP between 1993 and 1997. With fiscal spending outstripping tax revenue, the government's deficit has also increased. The consolidated central government deficit, excluding social security trust fund, was 2.1% of the GDP, on average between 1998 and 2005. The share of Korea's national debt in GDP more than doubled from 12.3% in late 1997 to 30.7% in late 2005.

In the wake of the 1997 financial crisis, the Korean government significantly reduced the burden of administrative regulations. From 1998 to 2000, for instance, roughly 4,500 pieces of rules and regulations were abolished. Nonetheless, the government has steadily increased the level of regulation since then. Between 2001 and 2007, the government introduced about 1,000 new administrative rules and regulations. To better understand where Korea is headed amid rising fiscal spending and regulatory interventions, one must look at what composes a government's actual size.

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