‘J-nomics’ aims at paradigm shift for economy to incomes from exports

The tax reforms announced Wednesday were the first phase in the Moon Jae-in administration’s attempt to shift Korea’s economic focus from exports by major conglomerates to boosting household incomes and improving domestic consumption.

So-called J-nomics - the “J” stands for Jae - is based on the idea that increases in jobs and improvements in incomes particularly in the middle and lower income classes will translate into spending that will drive the domestic economy.

The government is also hoping to get to grips with high levels of youth unemployment and the widening gap between the wealthy and the poor, which the liberal Moon government view as critical social problems that are crippling the economy.

“The past growth model is no longer valid,” said Finance Minister and Deputy Prime Minister for the Economy Kim Dong-yeon on Wednesday. “We need to fundamentally change the economic paradigm.”

A key move to improve household incomes was raising the minimum wage.

As promised on the campaign trail earlier this year, Moon’s government has made it clear that it supports raising the minimum wage to 10,000 won ($8.88) per hour by 2020.

A committee of government officials, labor union representatives and company representatives last month agreed to raise next year’s minimum wage to 7,530 won, 16.4 percent higher than this year’s 6,470 won.

It was the highest hike in 16 years. The last time the minimum wage rose at such rate was in 2001 when it was raised 16.6 percent.

The government has taken a step further in taxation reform.

In its tax reform, the government is offering subsidies to people it considers vulnerable including low income households, young people struggling to find jobs and senior citizens living on the minimum wage.

The government is giving 300,000 won a month for three months to people aged between 15 and 29 looking for jobs. That handout will be raised to 500,000 won per month for six months in 2019.

Additionally the government will be giving senior citizens 250,000 won for their monthly basic living allowance, up from the current 206,050 won.

The government plans to raise the amount to 300,000 won by 2021.

To encourage couples to have children, the government will be giving 100,000 won per month to families that have a toddler five years old or younger.

The government is also implementing policies that are targeted at increasing the disposable incomes of households by easing living expenses. Such measures include lowering housing costs.

In the next five years, public buildings including police stations, community centers and even post office that are 30 years or older will be required to build apartments on site for lease to low-income households when undergoing reconstruction.

The government is also promising a transportation card that will allow commuters unlimited access to public transportation, including bus and subways, for a set amount. It estimates this will reduce the cost of commuting by 30 percent.

In the plan announced Wednesday, the government increased subsides and tax cuts for small and medium-sized enterprises that hire new employees or upgrade contract workers to regular employment.

This will require bold increases in national spending. In fact, government spending this year alone is targeted at 7 percent higher than in the previous year, which exceeds the nominal growth rate projected at 4.6 percent. The nominal growth rate is the nation’s economic growth after inflation is factored in.

The government projects this year’s real economic growth at 3 percent.

The Moon government is not the first to believe in an economic growth model based on higher incomes and greater spending.

The idea became popular after the global financial meltdown in late 2008, when income disparity between the wealthy and the poor was blamed for low growth.

The Barack Obama administration in 2009 announced a raising of the federal minimum wage while Shinzo Abe’s cabinet in Japan encouraged major businesses to give their employees raises.

However, many are skeptical over whether the Moon administration will be able to continue to maintain wage-led growth by increasing budget spending.

Kim Won-shik an economics professor at Konkuk University, noted that the government will be faced with huge financial burden.

“If you grow government spending higher than the nominal economic growth, it is questionable if the country’s fiscal soundness could bear it,” Kim said.

While the government expects to pull in an additional 28 trillion won in the next five years from higher tax rates on the wealthy and major conglomerates, as well as various rollbacks of tax breaks offered to the upper class in the past, experts project that the government will have trouble raising the 178 trillion won it needs over the next five years.

The government raised the income taxes on those who make 300 million won or more and companies that make more than 200 billion won a year.

“This amount of [additional] taxation won’t be enough to even pay for welfare,” said Ahn Chang-nam, a tax professor at Kangnam University.

Many believe the government will have to raise taxes on other income classes.

Some have even proposed raising the value-added tax, which has remained at 10 percent since 1977.

However, Finance Minister Kim said the government is not looking into it.

Some experts question the fundamental idea that raising disposable incomes of average households will translate into economic growth.

“In order to consistently increase jobs and income, the government needs to push corporate restructuring, easing regulations and encouraging private businesses to increase investment and help generate added value,” said Pyo Hak-gil, Seoul National University’s honorary professor of economics.

BY HA NAM-HYUN, LEE HO-JEONG [lee.hojeong@joongang.co.kr]