Government lowers down growth target to 2.9 pct.

W3.9 tril. to be offered as EITC for low income households

By Yoon Ja-young

Tax refunds for low-income households will be increased to help them weather the faltering economy, while the tax on passenger vehicles will be cut to 3.5 percent from the current 5 percent until the end of the year. These are part of government measures to sustain low-income households suffering from the economic slowdown while boosting consumption.

“The government will do its best to ensure 3 percent economic growth. However, we should prepare for the worst case scenario regarding the trade conflict between the United States and China,” Strategy and Finance Minister Kim Dong-yeon said Wednesday while revealing the economic outlook and policy direction for the latter half of the year.

The government has turned pessimistic about the economy this year, lowering its growth target to 2.9 percent from the previous 3 percent. It cited the trade conflict as a main hurdle while rising oil prices will also restrict a recovery in exports and consumption.

Facility investment is expected to grow a mere 1.5 percent this year, which is pessimistic compared with the 3.3 percent estimated for last year. Exports will grow 5.3 percent, which is far smaller than the 15.8 percent growth last year. The number of newly added jobs will average 180,000, which is 140,000 down from the previously estimated 320,000. The government noted that corporate restructuring and the sluggish services sector will worsen the job market.

To sustain the low-income households amid the deteriorating economy, the government plans to expand the earned income tax credit (EITC). A total of 3.8 trillion won will be offered to 3.3 million households next year, which compares with 1.2 trillion won that benefited 1.6 million households this year. In the case of double-income households, those with less than 35 million won annual income and 200 million won in total assets can apply for the benefit.

The government will also bolster social safety net. The basic pension for senior citizens which currently stands at 200,000 won a month will be raised to 300,000 won from next year for those in the bottom 20 percent of the income bracket. A total of 600,000 public jobs will be offered for low-income senior citizens, while emergency relief funds will be expanded to those who suddenly lose their jobs.

The car tax cut comes after the consumer sentiment index recorded 105.5 in June, the lowest in 14 months. The ministry expects the tax cut to pull up private consumption by between 0.1 and 0.2 percentage points and gross domestic product (GDP) by an additional 0.1 percentage point as automobiles make up 11.7 percent of total retail sales and 45 percent of durable goods sales.

Some economists, however, point out that it lacks efforts to tackle the side effects of the steep minimum wage hike, which businesses and the self-employed have been complaining about.

“Many people lost jobs due to the minimum wage hike. As they are unemployed, they are excluded from the EITC,” said Prof. Shin Se-don at Sookmyung Women's University.

“The government plan doesn't include measures to cope with the side effects of the minimum wage hike. The effect is likely to be limited,” he said, also pointing out that it lacks detailed deregulation plans.