Yoon to seek small gov't stance to spur economic growth

Yoon Suk Yeol, then presidential candidate of the main opposition People Power Party, who was elected South Korea's new president, speaks as he is congratulated by party members and lawmakers at the National Assembly in Seoul, March 10. AP-Yonhap

President-elect Yoon Suk-yeol is expected to place top priority on creating jobs and easing regulations with a small government stance in a bid to prop up the economic recovery from the COVID-19 pandemic amid heightened economic uncertainties.

During his campaign, Yoon, 61, criticized liberal President Moon Jae-in for pursuing state-led economic growth, saying the private sector should be the driving force for a "fair and innovative" economy.

"The economic paradigm should be completely changed, led by the private sector and innovation, not by the government and its debt-incurring spending," Yoon said.

But Yoon will inherit a South Korean economy that needs calibrated policy measures as Russia's invasion of Ukraine raises fears of stagflation, a mix of high prices and slumping growth, amid surging energy costs.

Asia's fourth-largest economy is on a recovery track on the back of robust exports. But South Korea faces increased economic downside risks at home and abroad amid the upsurge in COVID-19 cases, global supply disruptions and the Ukraine crisis.

Citing brisk exports and improving private spending, the Bank of Korea (BOK) forecast the Korean economy to grow 3 percent this year after a 4 percent expansion last year. The BOK expects consumer prices to grow 3.1 percent for 2022, far above its inflation targeting of 2 percent.

Concerns are growing that the economic growth may lose steam to the 2 percent range as international sanctions against Russia could sap global demand, possibly hurting South Korea's exports.

Inflation growth could spike to the 4 percent range in March as the Ukraine conflict has jacked up energy costs. The Korean currency's sharp weakness against the U.S. dollar has boosted import bills, putting upward pressure on inflation.

South Korea's consumer prices grew 3.6 percent year-on-year in February, marking the fifth straight month that inflation has grown more than 3 percent.

The U.S. ban on imports of Russian oil and energy products is likely to fuel already high oil prices. South Korea depends mainly on imports for its energy needs.

High inflation reduces people's real income and hurts the livelihoods of people, sapping private spending and economic growth.

"Prices of oil and key raw materials have surged on concerns about supply disruptions, possibly placing downward pressure on the economy," the state-run Korea Development Institute (KDI) said.

Yoon is expected to seek expansionary fiscal spending to support businesses hit hard by the pandemic and underpin the economic recovery.

He promised to spend around 50 trillion won ($40.6 billion) to compensate small merchants for their losses caused by antivirus restrictions.

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Since 2020, the Moon government has drawn up seven extra budgets totaling 134 trillion won to cope with the fallout of the COVID-19 pandemic.

The incoming government is also likely to create another supplementary budget to fund Yoon's compensation program.

Yoon said he will cut unnecessary expenditure and use tax revenue to finance his spending plan. But given the hefty amount of support, it will be inevitable for the new government to resort to debt sales.

The President-elect is also forecast to focus on building a business friendly environment and offering support to companies in a bid to encourage them to create quality jobs.

President Moon placed top priority on creating jobs, promising to add 810,000 new jobs in the public sector during his five-year term; and the government increased state-arranged short-term jobs.

"Can we create jobs with taxes? Job creation is possible when firms make investments," Yoon said during a campaign event Sunday.

Yoon also aims to double the country's potential growth rate to 4 percent from the current 2 percent and build a sustainable welfare system with the strong economic growth.

The so-called "Innovation City" built in Gimcheon, North Gyeongsang Province is seen in this file photo. Korea Times file

In regard to the housing market, Yoon is expected to reform the property-related tax system.

Public discontent over the Moon administration's real estate policy mounted as skyrocketing home prices drove up the tax burden on homeowners and raised the cost for people seeking to rent or buy homes.

The government unleashed a set of measures to stabilize the housing market, including tax hikes and tighter lending rules. But the measures led to only a short-term letup in home prices as demand for homes continued.

Yoon promised to ease the so-called comprehensive real estate tax for single-home owners and overhaul other property-related taxes.

He pledged to supply 2.5 million new homes during his term and ease rules on reconstruction and redevelopment.

Yoon has not mentioned any plan to increase taxes, while the implementation of his election pledges would require trillions of won. He said he will "cautiously" push for the introduction of carbon taxes, but no details were revealed.

On state finances, Yoon promised to introduce a new fiscal rule within one year after he takes office, May 10.

In 2020, the finance ministry proposed a fiscal rule that would limit the country's debt to 60 percent of its GDP or its fiscal deficit to 3 percent starting in 2025. The new rule is subject to National Assembly approval.

Yoon criticized the government's proposed rule for being "not realistic," given that the national debt has been rising at an alarming pace.

The national debt is forecast to reach 1,075.7 trillion won this year and the debt-to-GDP ratio is expected to rise to a record high of 50.1 percent, according to the government's estimate. The fiscal deficit is expected to reach 70.8 trillion won this year, equivalent to 3.3 percent of GDP.

South Korea faces growing pressure on public finances as its chronically low birthrate and rapid aging will sharply jack up welfare costs over the long term. (Yonhap)