Refer Report
Ahead of the National Assembly audit, the government poured out measures to boost domestic demand. This comes amid criticism that salty budget planning and large-scale tax revenue deficits have led to a delay in domestic demand recovery. There are evaluations that it will be difficult to expect a policy effect because the plan presented this time is designed without financial support, such as tax reductions and expansion of policy finance.
■ Tax cuts and expansion of policy finance
On the 2nd, the government held an economic ministerial meeting chaired by Deputy Prime Minister and Minister of Strategy and Finance and announced the ‘recent domestic economy review and response direction’. As domestic demand recovery failed to meet expectations despite robust exports led by semiconductors, response measures were put forth for each sector of domestic demand, including weak investment, construction, and consumption.
The first card the government pulls out is again tax cuts. This means that they are trying to encourage investment by alleviating the tax burden. First, the government decided to extend the temporary investment tax credit for small and medium-sized companies for an additional year until the end of next year. The temporary investment tax credit is a system that provides an additional deduction of 10% points for the increase if a company invests a larger amount than the average annual investment amount for the previous three years. However, since this plan is all a matter of amendment to the law, it must pass the threshold of the National Assembly. Kang Ki-ryong, Director of Policy Coordination at the Ministry of Strategy and Finance, said, “At a recent meeting with the heads of the six economic organizations, mid-sized and small businesses strongly requested an extension of the temporary investment tax credit,” and added, “I don’t think the opposition party will be opposed to supporting small and medium-sized businesses either.”
The second card is the expansion of policy finance and system reform. It was decided to increase the amount of loans and guarantees provided to companies by 27.9 trillion won more than the previous plan. Of the increase, 16.8 trillion won was decided to be allocated to small and medium-sized companies. In addition, in order to reduce the construction cost burden of private investment projects such as roads, railways, and environment, it was decided to establish a special system for profitable private investment projects (BTO) and rental-type private investment projects (BTL). In addition, it was decided to speed up regulatory improvement efforts centered on the Investment Difficulties Reception Center (Korea Chamber of Commerce and Industry) and the Real Economy Support Team (Ministry of Trade, Industry and Energy).
■ Government that conserves finances and reaches out to businesses
What these measures to boost domestic demand have in common is that they do not use fiscal resources. In general, investment incentives through tax cuts or expansion of policy finance are evaluated as less effective than expansion of financial projects. For example, even if we try to supply more policy loans, it is difficult to achieve the goal if there is no demand for loans. Also, reducing the tax burden does not immediately lead to increased investment by companies. For this reason, when the economy freezes, the government injects finances to serve as a catalyst for economic recovery.
However, the government is not choosing this correct method. This is because, due to the obsession with sound finances, a salty budget was prepared that was significantly below the normal growth rate both last year and this year, and fiscal capacity has been greatly damaged due to tax revenue deficits in the tens of trillions of won for two consecutive years. There remains a last resort, such as the preparation of a supplementary budget to respond to the economic downturn, but by insisting on economic optimism by only looking at export performance, we have already entered the fourth quarter and even missed the timing of the preparation of the supplementary budget.
For this reason, the consumption promotion measures introduced by the government today are nothing more than a ‘rehash’ of past policies. Even the issuance of consumer coupons every time was limited to the level of ensuring that last month’s Chuseok measures were well implemented. Instead, the government proposed a plan to raise the limit on the value of agricultural and marine products that can be gifted under the Anti-Graft Act to 300,000 won, twice the current value. In other words, they chose to revise laws instead of investing finances.
What is especially notable about this measure is that it came out just before the National Assembly audit of government affairs began in earnest. This is the reason why some are pointing out that the government may have come up with a ‘scandalous’ domestic demand measure ahead of the National Assembly’s deliberation on the government’s poor management of the economy.
Ha Jun-kyung, a professor of economics at Hanyang University, said, “In a situation where finances, which directly affect domestic demand, have been tightened, private consumption measures are bound to have limitations,” adding, “Measures to stimulate domestic demand that are not supported by finances are only stopgap measures.”
Reporters Park Soo-ji and Choi Ha-yan suji@hani.co.kr
Source: Korean