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All the data are in log of real values, and per capita terms are used to remove any bias resulting from demographic factors. Following the definition of fiscal variables in Blanchard and Perotti (2002),28 fiscal variables, such as government spending and net taxes, are carefully defined.

28 _{‘Net taxes’ and ‘government spending’ are chosen as the two fiscal variables based on the belief that, ‘in the}

short run, fiscal policy works mainly through the effects of government spending and taxes on aggregate demand and the effects of aggregate demand on output’ (Blanchard and Perotti, 2002, p1332).

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3.4.2.1 Government Spending29

According to the GFS, the total expenditure of central government consists of current expenditure and capital expenditure. Current expenditure is composed of the purchase of goods and services, interest payments, and subsidies and other current transfers. In this research, government spending is defined as the purchases of goods and services, both current and capital. So, interest payments and subsidies and other current transfers in current expenditure are excluded from the scope of government spending. This alternative definition of government spending is the sum of government consumption and investment, which has been adopted by most recent studies in the literature (Blanchard and Perotti, 2002).

This classification is based on the fact that government spending on goods and services may have different effects from the other ones. That is, government spending on goods and services directly changes the aggregated demand of the economy, while transfers and interest payments make effects via real disposable income, which could be partially saved by households (Burriel et al., 2010).

Looking at government spending, current spending has taken a greater proportion than capital spending, except in 1999. Capital spending has shown much wider fluctuations during the last four decades. We can note that capital spending significantly increases during economic crises, such as the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis. This is due to the government’s fiscal expansion in the wake of the financial crises. Government spending as a share of GDP has decreased gradually during the last four decades.

29 _{‘Government spending’ is defined in order to exclude transfer payments and interest payments, which change}

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Figure 3.1 Government Spending in Korea

Government Spending Sub-components of Government Spending

Note: Government spending is in log of real value, and per capita term

3.4.2.2 Net Taxes

Following Blanchard and Perotti (2002), net taxes are defined as ‘the sum of personal tax and non-tax receipts, corporate profits tax receipts, indirect business tax and non-tax accruals, and contributions for social insurance, less transfer payments to persons and interest paid by the government. Transfer payments and interest payments are excluded from total current government revenue because they are considered as negative taxes’ (Blanchard and Perotti, 2002). For instance, transfer payments are assumed to be redistributed to the private sector and are not regarded as a resource withdrawal from the private (Tenhofen et al, 2010). 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Government Spending/GDP (%)

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Table 3.1 Contents of Government Revenue and Government Spending

Item Contents

Total Current Government Revenue

Current taxes receipts + Contributions for government

social insurance + Income receipts on assets +

Current transfer receipts +

Current surplus of government enterprises

Total Current Government Spending

Consumption expenditures + Current transfers + Interest payments + Subsidies - Wage accruals less disbursements

In conclusion, ‘net taxes’ are defined as ‘total current government revenue less current transfers and interest payments on government debt’. ‘Current transfers’ include ‘all expenditure items except public consumption, public investment and interest payments (Burriel et al., 2010).

Figure 3.2 illustrates net taxes during the last four decades. As mentioned above, net taxes are measured by subtracting current transfers to households and interest payments from total current government revenue. Net taxes show a gradual increase, even though there are some fluctuations in several periods. For example, net taxes significantly decrease in the late 1980s, due to the huge tax reform to boost the economy. And there were another two big fall of net taxes right after the 1997 Asian Financial Crisis and 2008 Global Financial Crisis. However, the net taxes-to-GDP ratio has gradually increased.

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Figure 3.2 Net Taxes in Korea

Net Taxes Net Taxes/GDP (%)

Note: Net Taxes is in log of real value, and per capita term

3.4.2.3 GDP and Its Components

Korea has experienced a very high level of economic growth over the last four decades. Figure 3.3 shows that GDP increased significantly, while there are two reductions, the Asian Financial Crisis in 1997 and the Global Financial Crisis in 2008.

Figure 3.3 GDP in Korea

Note: GDP is in log of real value, and per capita term

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 1 9 7 2 1 9 7 4 1 9 7 6 1 9 7 8 1 9 8 0 1 9 8 2 1 9 8 4 1 9 8 6 1 9 8 8 1 9 9 0 1 9 9 2 1 9 9 4 1 9 9 6 1 9 9 8 2 0 0 0 2 0 0 2 2 0 0 4 2 0 0 6 2 0 0 8 2 0 1 0 Net Taxes/GDP

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Figure 3.4 illustrates the changes in the sub-components of GDP: private consumption and private investment. Private consumption, , is defined as household consumption expenditure, including the consumption of non-profit institutions serving households. Private Investment, , is private gross fixed capital formation, which is calculated as gross fixed capital formation less government capital spending. Both sub- components have upward trends, showing significant decreases in the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis.

Figure 3.4 GDP and Its Components

Note: GDP and its components are in log of real values, and per capita terms

3.4.2.4 Labour Market Variables

The main interest with the labour market is how key variables respond to fiscal policy shocks. Manufacturing employment, , is an index number of full-time equivalent employment in the manufacturing sector with 2005 = 100. It increased significantly up until the early 1990s, peaked in 1991, and has fluctuated around the index number 100 ever since. It is notable that manufacturing employment has decreased three times in the early 1980s30, in the Asian Financial Crisis in 1997, and in the Global Financial Crisis in 2008. The real wage

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rate, , is an index number (2005 = 100) which represents wage rate or earnings per worker employed per specified time period (monthly). This is calculated by using the nominal wage and the consumer price index. The second column of Figure 3.5 shows the changing process of the real wage rate, . This has increased in a faster rate, except for the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis. Total hours worked, , is the average for establishments that have five or more employees. This series was obtained by using 28,000 sampled establishments with five or more employees across all industries, excluding the agriculture, fisheries and forestry sectors. Total hours worked, , has decreased continuously since 1994. However, there were two big falls in total hours worked caused by the 1997 Asian Financial Crisis and the 2008 Global Financial Crisis. The unemployment rate of whole economy, has been quite stable, except for the 1997 Asian Financial Crisis. It is calculated by dividing the number of unemployed by the size of the labour force.

Figure 3.5 Labour Market Variables in Korea

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