Preemptive Steps Eyed to Avert Economic Slowdown
By Lee Hyo-sik
Staff Reporter
The government plans to take all possible measures to maintain growth momentum as the economy slows on sluggish domestic demand and investment amid surging international oil and other raw material costs.
It plans to expand fiscal spending, cut taxes, ease regulations, support small companies and strengthen the service industry to boost the economy when a series of economic indices are increasingly pointing to a marked slowdown.
In a report to President Lee Myung-bak at Cheong Wa Dae Monday, the Ministry of Strategy and Finance also said the Bank of Korea (BOK) should adjust its monetary policy in accordance with changing economic conditions, calling on the central bank to lower key interest rates to stimulate investment and consumption.
Strategy and Finance Minister Kang Man-soo gave a pessimistic outlook on the world's 13th largest economy, saying it has lost momentum on stagnant private spending and corporate investment, and the pace of the slowdown is likely to accelerate in coming months.
``The domestic economy may continue to head downward for the rest of the year if internal and external conditions do not improve. A bigger problem is that consumer spending will likely remain sluggish because of higher costs of goods and services and sluggish job growth,'' he said.
Kang said most economic research institutes at home and abroad have revised Korea's 2008 growth projection to below 4.5 percent, substantially lower than the government target of 6 percent. The economy expanded 5 percent in 2007 from a year earlier.
The country's current account balance is projected to post up to $10 billion in deficit this year because of deteriorating trade terms amid skyrocketing international raw material costs and the high service account shortfall. The accumulated account deficit reached nearly $6 billion in the first three months to March.
Reflecting a slowdown in business activities, the ministry said the number of newly created jobs will remain below 200,000 for the foreseeable future, lower than the government target of 300,000 new jobs. In March, the number of employed totaled 23.3 million in March, up 184,000 from the same month last year, the lowest level since February 2005.
According to the central bank, the economy grew 0.7 percent in the first three months of the year from a quarter earlier, the lowest increase since the fourth quarter of 2004. Exports also fell 1.1 percent in the first quarter from the previous quarter and facility investment declined 0.1 percent. Private consumption gained 0.6 percent, decelerating from a 0.8 percent gain in the previous quarter.
Against these backdrops, the government said Monday that it would take a range of preemptive steps to boost domestic demand and counter growing downside risks.
First, the ministry will cooperate more closely with the BOK to manage the monetary policy in a more flexible manner to help improve macroeconomic conditions.
It then plans to slash this year's fiscal budget by 2.5 trillion won through a more efficient management of state-run projects and a cut in labor costs. The ministry will spend the money on boosting domestic demand and stabilizing the livelihoods of low-income earners.
Also, the government will take 4.9 trillion won out of last year's tax surplus of 15.3 trillion won and use the money to buoy the economy.
Third, the ministry said it will cut corporate income and other taxes to encourage businesses to expand investment and consumers spend more for higher growth. It plans to have the revised tax laws passed by the National Assembly in June to lower the corporate tax to 20 percent from the maximum of 25 percent over the next five years.
The government also plans to encourage public companies and state funds to increase spending by 5 trillion won this year to stimulate domestic demand.
Fourth, the ministry said it would take an array of steps to create a more business-friendly environment. It plans to ease rules on the development of Seoul and its adjacent areas and loosen grips on business activities of conglomerates in a bid to help them invest more here.
Fifth, the government is seeking to help stabilize the livelihoods of low-income earners and support small companies. Distribution channels of agricultural produces and other daily necessities will be improved to keep costs low amid rising consumer prices. A large-scale farmland will be developed in Mongolia and other countries to increase the country's food security.
To help small businesses cope with surging raw material prices and expand facilities, the government will ask the Korea Development Bank and other state banks to increase funding.