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Massive Projects Likely to Widen Fiscal Deficit
By Lee Hyo-sik
Staff Reporter
The government unveiled a $25 billion (about 33 trillion won) stimulus package that could propel growth to the 4 percent range, create 200,000 jobs and post a current account surplus of $5 billion next year.
The package is equal to 3.7 percent of the gross domestic product. Strategy and Finance Economy Minister Kang Man-soo expects inflation to fall to the 3 percent range next year, with the current account reverting to a surplus of $5 billion from a $10 billion deficit this year.
The package highlights 11 trillion won in additional fiscal spending to initiate public infrastructure projects, and three trillion won in tax cuts. Monday's package came following the 19 trillion won stimulus package unveiled last month.
All in all, Korea will spend a total of 33 trillion won to forestall recession next year, the minister said.
Despite the stimulus package, foreign research institutes predict that Asia's fourth largest economy will expand by below 4 percent next year on stagnant domestic consumption and falling exports as a result of the global economic slowdown, with UBS floating a possible 1.1 percent growth rate.
``The fallout from ongoing worldwide financial turmoil has begun spreading to the real economy. Now is the time for us to mobilize all possible measures to minimize the fallout and effectively ride out current hardship. If we go through the ongoing crisis well, we could emerge as a leading economy in the near future,'' Kang said, stressing the need for the planned stimulus measures.
LG Economic Research Institute economist Song Tae-jung said the unveiled steps will help mitigate the extent of the economic slowdown but will not change the course of the downturn.
``With the financial market showing signs of stabilizing, the most urgent task is to prevent the value of real estate from falling too quickly. The government should take steps to increase transactions and prop up the property market, while refraining from blindly supporting the construction industry and not creating a moral hazard among builders,'' he said.
Song added the additional 14 trillion won public expenditure and tax cuts will not worsen fiscal soundness, given the relatively low state debt level compared to other advanced economies. ``The government should be ready to increase spending further if economic conditions worsen.''
Additional Public Spending to Boost Domestic Demand
The government will adopt expansionary fiscal policies, totaling 14 trillion won ― 11 trillion won in public expenditure and 3 trillion won in tax cuts.
Of the 11 trillion won, it will spend 4.6 trillion won on expanding infrastructure while providing 3.4 trillion won to financially distressed small enterprises, small business owners, farmers and fishermen.
About 1 trillion won will be shelled out to support low-income households and an additional 1.1 trillion won to local governments. Public enterprises will also expand their investments by one trillion won.
The government plans to revise the 2009 budget bill (which is currently pending at the National Assembly) upward and submit the revision for approval by Friday.
The initial budget calls for 273.8 trillion won in spending, up 6.5 percent from this year's 257.2 trillion won, while issuing government bonds worth 7.3 trillion won.
But 2009 state expenditure will jump to 283.8 trillion won through the issuance of more state bonds. Most of the planned three trillion won in additional tax cuts will be provided to help companies expand plants and other business-related facilities.
Stabilizing Financial & Currency Markets
Besides a $30 billion currency swap agreement with the U.S., the government said it will continue to expand existing bilateral swap arrangements with China and Japan, as well as establish a tripartite swap fund.
To boost the nation's foreign reverses, the government plans to increase the ceiling on the issuance of foreign exchange stabilization bonds from the current 15 trillion won per year to 20.6 trillion won.
To promote exports and thus improve the current account balance, the government will expand the Export Insurance Fund to 170 trillion won next year from the current 130 trillion won, as well as sign free trade agreements with more countries.
It also plans to increase international cooperation with G20 members to jointly deal with the worldwide financial turbulence.
In a bid to calm the domestic financial market following the $100 billion guarantee of local lenders' foreign borrowings, the Bank of Korea will provide liquidity to securities firms and asset management companies by purchasing repurchase agreements. The government will encourage institutional investors' role in the stock market.
Boosting Real Estate Sector
The government will first ease restrictions on the reconstruction of apartment buildings and reduce the number of small-sized apartments requires to help increase housing supplies in urban areas and property transactions.
It plans to reduce the number of property speculation zones across the country. Only Gangnam, Seocho and Songpa districts in southern Seoul will remain speculation and heavy regulations and lending rules will not apply elsewhere.
Currently, Seoul and most of its adjacent areas are designated as areas for speculation, making it difficult to trade homes due to tight lending limits and punitive taxes.
To help the struggling construction industry, the government will enable the Korea Credit Guarantee Fund to provide additional liquidity to builders by guaranteeing the government's construction contract credit up to 30 billion won per company.
Promoting Investment through Deregulation
To encourage businesses to expand investment and create more jobs, the government plans to streamline and reduce excessive regulations regarding environment, land use, and labor issues.
Regulations on plant construction, facility expansion or relocation of industrial complexes within growth management zones and population control zones will be eased. A ban on large-scale building construction in wilderness areas will also be lifted as long as buildings meet pollution limits.
Environmental regulations deemed excessive compared to those of competing countries will be reviewed and streamlined. Regulations within environment protection zones will be converted from location restrictions to total mass emission control.
The government will also make efforts to enhance labor market flexibility. The employment system for temporary workers and dispatched workers will improve and complementary measures to ease the burden of enterprises will be considered.
It also plans to encourage new investments and facilitate job creation through service sector regulation reform. More efforts will be made to increase the competitiveness of high value-added services, including broadcasting, advertising, design and lower entry barriers for services such as education and medicine.
Supporting Small Firms & Low-Income Families
To ease financial burdens on small businesses, the government plans to prevent healthy enterprises from going bankrupt due to a short-term liquidity shortage. It will ask banks to lower lending rates to low-income households and expand welfare programs.
It will provide 1.3 trillion won to state banks (including the Korea Development Bank) to have them lend more to small companies while expanding credit guarantees to them by contributing 6 trillion won to the Korea Credit Guarantee Fund and the Korea Technology Guarantee Fund. Commercial lenders will also be asked to roll over loans extended to viable small companies.
To help middle and low-income brackets, the government will ask Korea Housing Finance Corp. to lower mortgage rates and convert floating-rate loans to fixed-rate ones and increase long-term fixed-rate mortgage supplies.
More efforts will be made to tackle youth unemployment by expanding internship programs and enhancing job-training programs.
The government will improve welfare support for low-income families and increase financial support for the unemployed and scholarship programs for low-income students.
Credit card companies will also be asked to lower credit card transaction fees for small retailers.
leehs@koreatimes.co.kr
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