Assembly finally passes the stimulus bill

After an 18-day wait, the ruling party and opposition passed a 22 trillion won ($18 billion) stimulus package including a supplementary budget a day after reports of a very weak second quarter due to struggling exports, a drought and the impact of Middle East respiratory syndrome (MERS).

But both sides had to compromise. The ruling party accepted a cut in the supplementary budget and agreed to discuss changes in corporate taxes. The opposition abandoned its demand for an immediate increase in corporate taxes.

Questions were immediately raised on whether the downsized supplementary budget can possibly help the economy achieve the 3 percent growth goal of the government or even the 2.8 percent projected by the central bank.

The stimulus bill was passed with 149 representatives in favor while 23 opposed and 35 abstained.

Earlier Friday, the National Assembly’s special committee on budget and accounts set the supplementary budget at 11.56 trillion won.

This was 263.8 billion won less than the 11.8 trillion won the government had submitted earlier this month.

The committee lawmakers said they cut 200 billion won from 5.6 trillion won in new revenue that was called for, which was coming from issuing government bonds.

In the part of the budget that was supposed to stimulate the economy, they have cut 475 billion won in spending and added 411.2 billion won in different forms of spending, which was a 63.8 billion won net cut from the government proposal.

The biggest cut was 250 billion won in spending on infrastructure projects.

Other major cuts included 181 billion won worth of government projects that were approved earlier by National Assembly lawmakers.

Both parties agreed to increase spending to help industries and businesses heavily affected by the MERS outbreak and the drought.

This included 150 billion won that will support businesses affected by MERS as well as 20.8 billion won that will be spent to improve prevention and management of infectious diseases.

The budget also includes 16.8 billion won that will be used to hire more teachers and assistants for day care centers.

The agreement on the supplementary budget was also conditional on the government including changes in corporate taxes in tax reforms that are to be announced next month.

The opposition New Politics Alliance for Democracy (NPAD) has been demanding a raise in the corporate tax rate to reduce tax shortfalls of the past three years.

This year, many expect another tax shortfall because of the effect of MERS and the drought on businesses and the economy in general.

Although no specific compromise has been reached, the Saenuri Party has agreed to discuss the issue of raising corporate taxes in some way.

Instead of raising the corporate tax rate, the ruling party and the government have agreed with the NPAD to make changes in various tax benefits and exemptions related to corporate investments, research and development.

NPAD leader Moon Jae-in Friday said the negotiations on corporate taxes have not yet reached the party’s goal, but he claimed a partial victory.

It took nearly a month for the stimulus bill to pass, and its actual effect on the economy is being debated.

Hyundai Research Institute (HRI) lowered its economic growth projection for this year to 2.6 percent, far below the Bank of Korea’s 2.8 percent and the Finance Ministry’s 3.1 percent citing the cuts in the supplementary budget.

The HRI believes that for the economy to grow even close to 3 percent, the supplementary budget would have to be at least 22 trillion won.

In its report released Friday, the research institute said the size of the supplementary budget is not enough because exports are so weak and the impact of MERS and the drought was much worse than expected.

Even if the second half achieves 3.1 percent growth, annual growth will be limited to 2.6 percent, it said.

The research institute lowered its outlook for this year from 3.6 percent to 3 percent last month.

“The economic struggle caused by MERS and the drought is more critical than anticipated,” said HRI researcher Hong Joon-pyo.

“The size of the supplementary budget is relatively small and even if the 11 trillion won is spent, the growth rate will not reach expectations.

“If the supplementary budget is focused on creating jobs, providing vouchers for low and mid income families and R&D investments, it will help in revitalizing the economy.”

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]