Yoon proposes tax cuts and other pro-market measures

Economy

Published: 16 Jun. 2022, 18:08 Updated: 17 Jun. 2022, 13:40

Yoon proposes tax cuts and other pro-market measures

President Yoon Suk-yeol, center, being briefed on the government’s economic plan at the Business Growth Center in Pangyo Techno Valley, Gyeonggi, on Thursday. Those attending included Finance Minister and Economics Deputy Prime Minister Choo Kyung-ho. economics secretary Choi Sang-mok and SK Group chairman and Korea Chamber of Commerce and Industry chairman Chey Tae-won. [YONHAP]

The administration of Yoon Suk-yeol issued a raft of proposals Thursday for policy that will put the private sector first and help those hit hard by economic turmoil.

Yoon's wish list, which includes tax cuts for businesses and homeowners and tax credits for some, signals an about face from the previous administration, which sought to change the economic paradigm by boosting demand with income support.

"We need to change our economy to be led by the private sector and the market at a time when we're in a crisis," Yoon said on Thursday. "If not, it will be difficult to overcome the complex crisis."

The government is forecasting 2.6 percent growth this year and 4.7 percent inflation, up from previous estimates and far higher than those from international institutions.

As central banks globally raise rates, households and companies are increasingly under pressure. Exports, which are the engine of the Korean economy, could weaken as a result.

Stagflation is a distinct possibility.

"The government has to focus all of its capacity to help the private sector create more jobs and new opportunities for the people," Yoon said. "The government needs to remove outdated regulations that obstruct innovation and new industries from the private sector as well as customary constraints that aren't legally based that could hamper entrepreneurship."

Stressing the threat of stagflation and other complications negatively affecting the economy, President Yoon said the country needs to solve the chronic low-growth problem and polarization.

He said Korea can no longer could allow investment and production in the private sector to shrink and that the government will do all it can to support R&D and employment training, especially investment related to strategic assets such as semiconductors.

While stressing bold reform, he also emphasized cracking down on illegal and manipulative practices that could hurt the fair market. He also stressed social structural changes, including labor and pension reform, noting that these changes can no longer be delayed.

"Even if the policies aren't popular, we will plow through it," Yoon said. "We must."

The Finance Ministry has stressed that excessive government regulation and involvement has limited businesses autonomy, which also restrained investment from the private sector. The heavy regulation also limited jobs, the government claims.

The initiatives target inflation by focusing on the supply side.

"We have to stabilize the prices of daily goods as much as possible by lowering the production costs," Yoon said.

Taxation is one focus.
One of the key measures that the government presented was the lowering of the maximum corporate tax rate from 25 percent to 22 percent. It will be the first lowering of corporate tax rate in 13 years and a switch from the Moon government.

The last time corporate tax was lowered was during the Lee Myung-bak administration, which cut the corporate tax from 25 percent to 22 percent.

In 2017, the Moon government set a 25 percent tax rate for earnings exceeding 300 billion won.

The biggest concern is if the tax reform lowers the tax take from corporations, which provide 25 percent of revenue.

Under Yoon's plan, companies will receive increased credits for facilities investment.

Policies supporting start-ups include expanding the tax exemption on stock options from 50 million won to 200 million won. The government expects the increase in the stock option exemption will help start-ups attract talented workers.

Other business-friendly policies in the government plan include exempting repatriated profits.

Housing tax reform
The economic plan also includes lowering tax costs for homeowners.

Only 60 percent of the assessed value will be used in calculating the comprehensive real estate holding tax instead of fully applying the entire value.

The comprehensive real estate holding tax, which was first adopted in 2005, is a tax on properties with assessed value is 1.1 billion won or above. This bar has been raised from 900 million won last year.

For those that owns multiple housing units, the homeowner is taxed on assessed value exceeding 600 million won.

A tax credit of 300 million won will be granted to single apartment owners for one year, and people 60 and above in the same apartment for 5 or more years will be able to defer comprehensive real estate taxes.

One of the conditions is that the apartment owner's annual income has to be less than 70 million won.

For those that have temporarily become the owner of two apartments or more due to unexpected circumstances, including inheriting the property due to the death of a parent, the government plans to temporarily not include the additional apartment in calculating the holding tax.

The assessed values of properties taxed by the local government will be lowered from current 60 percent to 45 percent for those owning a single apartment. This will shave 0.05 percentage points off the tax rate. The comprehensive real estate holding tax is taxed by the central government.

Details will be introduced in July.

In the third quarter, the government plans to ease the loan-to-value ratio on mortgages for first time homebuyers to 80 percent. It will announce its 2.5 million housing unit supply roadmap in the third quarter.

Public and pension reform
Another key issue is the public sector, mainly pension reform.

The government said not only will it work on raising the efficiency of the public sector but also work on labor reforms, including the 52-hour workweek and pension reform.

The goal is to create a plan by the second half of 2023.

The government emphasized the worsening government fiscal balance. It noted that the economic policies that were heavily focused on government funding and aggressive spending during Covid-19 have resulted in the sharp increase in national debt.

The national debt-to-GDP ratio is already near 50 percent as it is expected to exceed 1,000 trillion won by the end of this year. Amid snowballing debt and deficits, pension reform has been pushed back.

Economic outlook
Despite external conditions mostly driven by spiking commodity prices, the Korean government said it expects relatively slower growth in exports in the second half.

It projects exports to grow 11 percent this year.

Exports to major trading partners are expected to grow more slowly. Exports to the U.S. are expected to expand 2.5 percent instead of the 3.7 percent projected earlier, while exports to China are seen growing 4.4 percent instead of 5.1 percent.

Imports are expected to grow 18 percent.

In December, the government projected exports to grow 2 percent and imports 2.5 percent this year, citing the absence of the base effect the country enjoyed in 2021.

Due to sharper increase in imports and a likely service account deficit, the government projects the account balance surplus to total $45 billion. That's a sharp drop from $80 billion projected in December.

Consumer spending is expected to increase 3.7 percent, which is almost the same as the projection made last year.

The government projected that the lifting of quarantine measures and the speedy recovery of face-to-face businesses will drive up spending.

Credit card spending in April increased 13.8 percent year-on-year, and in May it grew 16.4 percent.

If consumer prices rise 4.7 percent as projected, it will be the sharpest increase since 2008.

This will have a negative impact on facility investment and construction investment, which are expected to contract 3 percent and 1.5 percent, respectively.

Last year the government projected facility investment and construction investment to grow 3 percent and 2.7 percent this year.

The number of people with jobs is expected to increase sharply. Last year, the government projected 280,000 additional people to have jobs by the end of this year. That figure has been raised to 680,000.

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