Government shifts focus from income-led growth

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Government shifts focus from income-led growth

As Korea struggles with a slowing economy, the government has promised to focus on stimulus investment and consumption in the second half of the year.

The Ministry of Economy and Finance unveiled Wednesday its plans to boost corporate investment and private spending. Its program includes tax deductions on facilities investment, the expediting of construction projects, worth a total of 8 trillion won ($6.8 billion) and an increase in purchase limits at domestic duty-free stores.

The measures come as the government lowered the country’s economic growth target by 0.2 percentage points to a range of 2.4 percent to 2.5 percent as exports and investment continue to slow.

Exports in the first half of the year dropped 8.5 percent compared to the same period a year earlier.

Investment has lagged this year, with facilities investment declining 17.4 percent in the first quarter from a year earlier and construction investment falling 7.2 percent over the same period.

“In order to respond to the growing downward risks, investment must be active,” said Finance Minister Hong Nam-ki at the announcement of the government plan on Wednesday. “We will direct investment into private and public sectors to stimulate the conditions for investment.”

Hong announced that the government will increase tax deductions for companies making investments to increase manufacturing capacity at facilities.

Under the plan, companies with assets under 500 billion won will enjoy a tax-deduction rate of 10 percent from the current 7 percent for the investment. Tax-deduction rates for companies with assets less than 5 trillion won will rise to 5 percent from 3 percent, while the rate for larger companies will double to 2 percent.

The government added that it will speed up administrative processes for the approval of four major construction projects in the second half of the year. They are worth a total of around 8 trillion won.

The projects include a 1,000-acre theme park in Hwaseong, Gyeonggi, with a water park, shopping mall and hotel. The theme park is estimated to cost 4.6 trillion won.

In terms of consumption, the government is extending its temporary reduction of the individual consumption tax for vehicle purchases until the end of the year. Car buyers will continue pay a 3.5-percent rate as opposed to the usual 5 percent rate.

The ministry said it will further lower the tax rate for individuals replacing vehicles that are 15 years old or older with new vehicles.

It also unveiled plans to increase purchase limits for Korean nationals at domestic duty-free stores to $5,000 from $3,000 and provide a 10-percent discount for those who buy electric appliances with high efficiency ratings.

The focus on investment and consumption is a shift from the administration’s signature income-led growth policy, which sought economic growth by driving up incomes.

While the government announcement mentioned support measures for the underprivileged, such as low-interest loans for mom-and-pop stores, it emphasized stimulus.

Finance Minister Hong remained cautious about placing a burden on companies.

“We will provide support so that next year’s minimum wage is decided by the minimum wage committee under rational standards,” said Hong. “We will prepare measures so that the 52-hour workweek does not place too much stress on small- and medium-sized companies.”

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