Don’t protract national pension and fiscal reforms

“The Direction of Economic Policy” announced by the Ministry of Economy and Finance twice a year carries the government’s diagnosis of the country’s economic conditions and detailed solutions. The report has been criticized for the ministry’s outmoded ways of delivery — collecting policies from each ministry and releasing them to the press. But the report played a positive role as it offered a chance for the government to fine-tune various policies.

The report the ministry announced Wednesday is only 14 pages long, far shorter than last year’s 57-page report. Instead, the government additionally presented a 69-page report titled “The Roadmap to Dynamic Economy,” often stressed by Deputy Prime Minister for Economic Affairs Choi Sang-mok, who also serves as finance minister. He said that while the short report focuses on presenting short-term prescriptions for the economy, the long report concentrates on suggesting long-term solutions to structural problems.

What attracts our attention is a policy to maximize the use of capital, land and labor — the three major factors of production. For capital, the government aims to revitalize the venture capital sector and raise the value of Korean stocks through the much-hyped Corporate Value-up Program. For land, it plans to ease regulations on land to exploit highlands and farmlands for industrial purposes. For labor, the government seeks to foster talents for cutting-edge technology and increase the share of foreign workers.

The government also plans to deduct the corporate tax on shareholder returns, impose a low-rate tax on an increase in dividends and scrap the surcharge on inheritance tax for the largest shareholder. If the government reinvigorates the three production factors, it can help elevate a potential growth rate. But most of the tax policies should be approved by the National Assembly dominated by the majority opposition.

The government presented a road map for labor reforms through the rationalization of the current wage system and the improvement of rigid work hours, as well as a blueprint for education reforms, including a scheme to restructure private universities. But the report has left out the fiscal reform urgently needed to reinvent the national pension system and raise the sustainability of the pension. Given Korea’s pitifully low fertility rate and fast ageing, the government must raise the pension premium to sustain the pension system without giving a financial burden to future generations.

The government must announce the Fiscal Vision 2050 containing its mid- to long-term strategy. It must not protract the announcement citing the opposition-controlled legislature. The government must first normalize low utility bills. Korea’s future depends on these reforms over the next two years without national-level elections.