Policy Issues (July 2012)
Economic Policy Directions for the Second Half of 2012 Economic outlook for the second half of 2012 Although the global economy has moderately recovered this year, concerns over the European debt crisis are growing, and the outlook for future growth has dimmed. Korea’s economic growth has been revised down to 3.3 percent from 3.7 percent because external conditions, which have been negatively affected by the European crisis, have delayed a full recovery. In the second half of 2012, however, the economy is expected to see job markets and domestic demand improve and exports recover, while consumer price inflation is slowing down. Inflation is projected to stand at 2.8 percent, helped by stabilizing oil and other commodity prices. The current account is expected to show a surplus of US$18 billion in 2012, as a decrease in the goods account surplus will be offset by the improving service account. In 2013, the Korean economy is forecast to grow 4.3 percent, helped by a global economic recovery. Jobs will increase by 330,000 and prices by 3.0 percent. The current account surplus will narrow to US$15 billion as recovering domestic demand will boost imports. Economic policies for the second half of 2012 The economic policies for the second half of 2012 will focus on minimizing the effect of the global economic crisis on the Korean economy and supporting the working classes, while pursuing economic reform. The government will redouble its efforts to promote an economic recovery to safeguard against potentially longlasting global uncertainties. First of all, the government will keep running the emergency monitoring system and review the existing contingency plans, while lowering household debts to a manageable level and achieving fiscal soundness. The government will continue fiscal stimulus in the second half, despite a front-loaded fiscal adjustment in the first half, by minimizing budgets left unspent or transferred to the next term. Private investment will be boosted as the government will encourage investment by small- and medium-sized enterprises (SMEs) and foreigners, and reinforce the construction sector. With trade exceeding US$1 trillion, Korea needs to diversify its foreign markets. To help businesses find new export markets, the government will come up with specific strategies unique to each market, particularly growing markets in emerging economies and the Middle East. Service and green industries will continue to be nurtured as future growth engines, while mid- to long-term polices related to demographic and climate changes will be addressed. As the working class is vulnerable to external shocks, the government will prioritize supporting the working class by keeping prices stable and creating jobs. The government will swiftly respond to short-term price volatility caused by imbalances in supply and demand, while seeking to improve distribution systems. Job creation for young adults and baby boomers will take the top priority and taxes will be revised to be more employmentfriendly. There will be increased support for working class housing as well as expanded micro-financing. Welfare programs will be improved to benefit the members of society who most require them. The seven tasks of the second half of 2012 The seven most important tasks in the second half of 2012 are 1) dealing with the global financial crisis effectively, 2) continuing fiscal stimulus by assigning supplementary budgets and increasing budgetary spending, 3) backing private investment with a facility investment fund, 4) keeping consumer prices in the two percent range with improved distribution systems, 5) creating 400,000 jobs this year and revising taxes to be more employmentfriendly, 6) promoting micro-financing and housing support, and 7) nurturing future growth engines such as the service and green industries, while preparing for demographic changes. 1. Dealing with the global fiscal crisis effectively Due to the possibility that the current financial crisis will continue, the government will step up its current monitoring system while persistently reviewing and revising contingency plans so that volatilities in the domestic financial market can be successfully dealt with and the real economy can be prevented from being negatively affected. A public-private joint meeting chaired by the President will be held every month to check domestic and external uncertainties and prepare for them. Various meetings to examine the current economic and financial situation are going to be merged into one regular meeting whose purpose will be to check the state of macroeconomic soundness. To prevent a crisis from arising, the government will help reduce household debt, achieve fiscal consolidation and build financial safety nets. To promote disciplined consumption, the tax deduction system for spending will be revised to favor debit cards over credit cards. Thirty percent of spending just up to 3 million won will be tax deductable in the case of debit card use, compared with 20 percent for credit card. Covered bonds, which are expected to facilitate banks’ long-term and fixed rate lending, will become mandatory, and the government along with the Bank of Korea will financially support the Korea Housing Finance Cooperation in 2012 and 2013. Fiscal spending will be more tightly controlled by examining the performance of fiscal projects, setting standards for fiscal spending and separately managing mandatory and discretionary spending, while factors that may risk fiscal soundness will be thoroughly examined and promptly responded to through a system exclusively developed to deal with such risks. Local governments’ fiscal soundness needs to be improved. The government will not allow any new tax incentives to be implemented by local governments. The support for local governments will be closely investigated, and stricter procedures will be applied to the foundation of local public firms. To strengthen the country’s financial system, the government will impose a stricter capital ratio requirement as well as demand improved asset soundness from financial institutions. In addition, rules related to capital markets will be revised, as will those concerning the governance of financial firms. 2. Continuing fiscal stimulus by assigning supplementary budgets and increasing budget spending There will be an increase in the funds used to support the working class, SMEs, small businesses and service industries. Terms of mortgages will be eased for those who want to purchase houses if they are from the working class. There will also be price stability support to improve distribution and storage. Young business startups will be eligible for government guaranteed financing, and funds for small businesses will be recapitalized. Infrastructure needed to grow tourism and leisure industries will be reinforced, and support for industries related to sports, culture and art will be increased. There will be increased investment in social overhead capital projects because they help the economy. More public investment will be made in projects such as innovative city construction, which will start earlier than planned, and the improvement of power generating facilities and dam construction. To encourage private investment in public projects, the projects will be managed more strictly and private investors will receive more incentives. The government will maximize budget spending in the second half by minimizing budgets left unspent or transferred to next year. 3. Backing private investment with the facility investment fund The government will relax rules which might restrict investment in SMEs, while supporting investment by foreign investors. The Korea Development Bank and the Industrial Bank of Korea will create a facility investment fund which will be used to finance facility investment by enterprises including SMEs. Expenses charged for using farm land will be waived until the end of 2013 in free economic zones, and the minimum amount of cash support given to foreign investors will be lifted for the support to be more effective. The foreign investor support system will be revised by the end of August to provide fast, thoughtful, on-the-spot service. To help construction companies run their businesses and improve the soundness of construction projects, the government will provide financial support including the project financing fund recapitalization, tax incentives for REITs and an increase in the amount of won in the fund from 99.2 billion to 194.2 billion to help construction companies. Primary CBOs (Collateralized Bond Obligations) of 1.7 trillion won will be issued to help relieve the financial stress felt by small- and medium-sized builders, while government guarantee of bridge loans to help proceed with building construction will be available again. The government will apply stricter rules on financially troubled real estate developers, and the troubled developers will be taken away construction rights. A system of evaluating real estate development projects will be adopted, which is expected to act as a guide toward healthy real estate development. Korea should take advantage of growing emerging economies through trade. A consulting body of government agencies dealing with trade and economic cooperation with China will be set up to help promote trade and cooperation between the two countries. The Export-Import Bank of Korea will increase export credit, and the budget for the trade insurance fund will also be expanded to help broaden export markets to emerging economies including the Middle East. 4. Keeping consumer price inflation in the two percent range with improved distribution systems To stabilize petroleum product prices, the government will continue to actively pursue the expansion of thrifty gas stations and sales of various brands at one gas station, while diversifying oil suppliers. There will be 1,000 thrifty gas stations nationwide including 25 in Seoul by the end of this year. A joint public-private watchdog will closely monitor for any exclusive purchase contracts made between oil refiners and gas stations. Tariffs for online trade will be applied to oil imports starting July 2012, and oil import charges will be refunded at the full price of 16 won per liter. On top of that, there will be a new energy supplier, the fifth one, beginning in the second half of 2012, which is also expected to contribute to lower energy prices through increased competition. The government will strengthen its forecasting of agricultural and fishery product harvests to help stabilize food prices, and will increase contract farming and the stock of farm products. There will be flexible management of tariff quotas to increase imports in time of need. The Korea Agro-fisheries and Food Cooperation will directly import sugar, while saccharine will remain under relaxed regulation. The government will pursue the improvement of distribution systems based on items. The prices of basic necessities will be closely watched, and the price difference of imports from other countries and the effects of FTAs will be thoroughly analyzed. The government will work on and manage the mid-term consumer price target after 2013. The indices for consumer prices will be changed every 2-3 years, instead of every 5 years. 5. Creating 400,000 jobs this year, while adopting employment-friendly taxes Young male adults attending the Defense Ministry’s special job training program will be given favors when they apply for positions during their military service. The army will provide young male adults with employment services 1-2 months before leaving the army, including consultation. There will be 70 billion won of financial support for youth startups, an increase of 20 billion won from the originally planned 50 billion won. Young adults interested in working in overseas construction will have a chance to receive specialized job training. Public institutions will increase their employment of high school graduates by 2,400, on top of 15,300 in additional employment already planned in 2012. Retired baby boomers will get help when they look for jobs or start businesses. Self employed business owners with an annual revenue of less than 150 million won will be eligible to enroll in government programs for job training and employment service if they want to change careers. To encourage employment by enterprises, the government will revise taxes to be more employment-friendly. Tax incentives for job creation will involve increased tax deductions for investment that encourages employment, tax deductions for SMEs which re-employ young adults returning from military service, and expanded income tax reductions for the crew members of overseas voyages due to the crew shortage of 6,000 predicted to last until 2020. 6. Promoting micro-financing and housing support To help the financially vulnerable, the government, in cooperation with the Bank of Korea, will come up with measures to increase the credit of those with low credit scores or low income. The government will also allow joint business activities by savings banks and mainstream banks so that various kinds of loans with various interest rates can be introduced. The Financial Consumer Protection Act is planned to be enacted to protect financial consumers, and acts concerning private lending will be revised to introduce a ceiling on the interest rates of private loans. Illegal predatory lending will continue to be under strict control, and microfinancing will be expanded. Emergency loans such as those for tuition and living costs, will be available through the micro-financing program called Miso financing. The government will provide housing support according to people’s needs. Working class people who want to purchase houses will be able to purchase mortgages with lowered interest rates. The real estate acquisition tax will be waived until the end of 2012 in the case of single home owners. The standardized rent contract will be revised so that those who rent houses can avoid financial burden when they have to break contracts when any unavoidable situation arises. There will be an increased income tax deduction on rent from the current 40 percent. The government will review and revise current measures to boost the supply of small housing. 7. Nurturing future growth engines and preparing for the future The Service Industry Act will be put back on the table to be enacted, while any unfair dealings between the manufacturing sector and the service sector will be looked for and corrective action will be taken. Efforts to attract Chinese tourists will be boosted by extending the length of multiple visas from 3 years to 5 years, reinforcing interpretation services and relaxing hotel construction regulation. The greenhouse gas emissions reduction targets of each enterprise will be examined and adjusted, due to the enforcement of the Emission Trading System Act enacted in November, which stipulates emissions trading details, such as certified emission reduction (CER). To encourage the development of green industries, the government will extend the tax exemption for energy technology SMEs until the end of 2012, while introducing a tax deduction of 10 percent for facility investment which will reduce green house gas emissions. The government will revise the taxes on retirement pensions and ease housing pension requirements to reflect the country’s growing ageing population. Banks will be encouraged to invite savings in foreign currencies, and non-residents will be encouraged to make deposit at domestic banks. There will be tax incentives for banks and foreign depositors on the savings. Experts will seek ways to stabilize the sovereign bond market, such as launching market stabilization bonds, increasing direct purchasing by public institutions and reinforcing international cooperation. Mid- and long-term reports on future challenges and policies will come out in September, particularly dealing with climate change, low birth rates, an ageing population and social integration.
Jul 2012
