Pulled in all directions, MBnomics in tatters

By Kim Tong-hyung

Lee Myung-bak came to office more as a business-savvy politician than most presidents and vowed to pin his legacy on putting Korea back on the road to prosperity.

Three years later, however, Lee’s once-ambitious growth-first economic policies, dubbed as ``MBnomics,’’ are barely alive and breathing heavily. And interestingly, it’s lawmakers from the ruling Grand National Party (GNP) who are eager to pour dirt on the grave.

Soaring inflation _ driven by the inexorable rise in the prices of food, fuel and other essentials _ now provides an ultimate test to the Lee administration’s commitment in putting growth before price stability.

It bears further watching how long policymakers could manage to stick with their pre-year target of 5 percent gross domestic product (GDP) growth on 3 percent consumer price inflation set for 2011, which has been looking ridiculous for some time now.

And the GNP’s crushing defeat in the recent by-elections may also double as a eulogy for Lee’s long-planned tax cuts, which along with deregulation, had been at the core of MBnomics and the centerpiece of his domestic political agenda.

Distress over its by-election failure has led to an upheaval of the GNP’s leadership at the expense of some of Lee’s close confidants. Hwang Woo-yea, the new floor leader, claims that the traditionally-conservative party can no longer afford to back extending tax cuts for the wealthiest Koreans when it desperately needs more votes from lower- and middle-income taxpayers ahead of next year’s general and presidential elections.

``We will be withdrawing our support on policies for additional reductions on income and corporate taxes,’’ Hwang said earlier this week.

``What the GNP needs to show to the people is that it’s a political party that has detailed understanding of the economic realities at the household level and committed to improving life for `seomin’ (low-to-middle-class families). By scrapping the plans for tax cuts and tapping into surplus tax revenue, we could have an extra 10 trillion won (about $9.3 billion) to be used on policies to stabilize economic and living conditions for the non-wealthy.’’

Hwang suggested that the money could be used on education and family support programs, such as introducing compulsory education for children under the age of five and supporting college tuition fees, as well as building more affordable homes for first-time buyers.

Predictably, Cheong Wa Dae officials balked at Hwang’s comments, saying there has been no serious discussions between the government and GNP over reversing the direction on tax reductions.

Nonetheless, it looks highly unlikely that the government can push ahead with tax cuts targeting the rich now when it hadn’t been able to do it in the past two years. Hwang and other GNP leaders bailing from the tax cutting-platform could prove to be the final nail in the coffin.

The government has been seeking to shave the rate of income tax by 2 percent, from 35 to 33 percent, for those in the top income bracket _ individuals making more than 88 million won (about $82,000) a year. The corporate tax rate was to be reduced to 20 percent from 22 percent.

The cuts were originally intended to be implemented last year, but were pushed back until 2012 as lawmakers hammered out a difficult agreement. Now, a dejected GNP is moving to ensure that the changes they had fought so hard for never take hold.

``The plan for reducing corporate taxes will have a better chance of surviving than that for reducing income taxes, which appears pretty much dead. Those supporting lowered income tax for the rich are now a minority within the GNP,’’ said a government official.

``The arguments over tax cuts between government officials and lawmakers will likely be heated during the parliamentary hearings on finance minister nominee Bahk Jae-wan. It’s unlikely that Bahk will endorse scrapping the plans, so we could be in for a lengthy debate.’’

Progressive critics say that the tax cuts for the rich in past years, including the watering down of the comprehensive real-estate tax imposed on wealthy property owners, have contributed to growing inequality and a shifting of the economic burden to the poor and middle class.

And even an increasing number of centralist observers are claiming that the government can’t afford further tax cuts for the wealthiest when it’s already struggling with a revenue shortfall.

The Strategy and Finance Ministry is expecting a fiscal deficit of 25.1 trillion won for this year, which would be around 2 percent of an entire year’s GDP. This is despite the fact that the size of the government budget is less than 35 percent of GDP, compared to the 45 percent average of Organization for Economic Cooperation and Development member nations.

Taming inflation, which has been at least a point above the government target since the start of the year, is providing to be extremely difficult.

Reluctant to clamp down on the money supply when rising prices are coupled with subdued economic activity, the government has instead resorted to price controls, such as stemming the increase in utility bills, university fees and other items of consumer spending. However, critics wonder whether suppressing prices now will have them springing dramatically up in the latter part of the year.

The consumer price index rose 4.2 percent in April, the fourth consecutive month that inflation has exceeded the government’ 3 percent target and the Bank of Korea’s maximum target of 4 percent. This was after consumer price growth hit a 29-month high of 4.7 percent in March.

Although the soaring cost of oil, food and other essentials continue to squeeze hard-pressed consumers, the BOK’s rate setters have been holding their trigger fingers as they judge the recovery too fragile to withstand a dramatic increase in borrowing costs. Instead, policymakers are willing to bet the current inflation is temporary and will slow once food and fuel prices come down.

The International Monetary Fund (IMF), however, is less optimistic as it forecasts an inflation rate of 4.5 percent for Korea in its outlook for the world economy in 2011, predicting that the current price pressures will persist through the end of the year.