The government is poised to mobilize all available resources to prop up the rapidly cooling economy but the outlook is dark amid the protracted eurozone debt crisis, delayed recovery in the U.S. and a slowdown in China.
The Ministry of Strategy and Finance unveiled a 5.9 trillion won stimulus package Monday to boost domestic demand amid sluggish exports. The package, which envisions 4.6 trillion won in fiscal support for the remainder of this year and 1.3 trillion won next year, will come mostly in the form of tax cuts intended to stimulate domestic consumption. The move, which followed a package worth 8.5 trillion won in June, doesn’t require an additional budget.
In an effort to revitalize the flagging real estate market, capital gains taxes will be exempted for five years for newly built homes purchased this year. The housing acquisition tax will also be halved for home purchases taking place for the rest of this year.
Consumption taxes for cars will be cut by 1.5 percentage points to 3.5 percent for small cars and 6.5 percent for big cars by the end of the year and those for home appliances will be lowered to 3.5 percent.
To help salaried workers spend more, the amount of withholding taxes on their earned income will be lowered by 10 percent on average.
The new package is expected to trigger GDP growth of 0.06 percentage points this year and 0.10 percentage points next year. In June, the government revised its growth forecast for 2012 down to 3.3 percent from its earlier projection of 3.7 percent. More recently, however, analysts expect the nation’s economic growth for this year to fall short of 3 percent with some even forecasting the growth to stay in the 1 percent range in the second half of the year.
The government deserves praise for tiding over pressure from political parties to draw up a supplementary budget and opting for fiscal support through tax cuts, considering that the extra budget is detrimental to the fiscal soundness and needs to be kept as the last resort.
Given that the new package is worth 5.9 trillion won, nearly triple the amount originally talked about, the government is certain to feel the severity of the latest economic plight. Nevertheless, questions arise with respect to the latest package.
More than anything else, the government appears to have missed the timing in lowering taxes related to real estate. Specifically, the measures on real estate could dent the fiscal health of local government and give special favors to the wealthy.
Simultaneously, there could be controversy over fairness with regard to lowering consumption taxes only for cars and home appliances that are manufactured by large companies.
Most worrisome is that the package lacks substantial measures to stimulate corporate investment.
Ominously enough, we feel the structural problem of the Korean economy ― the advent of the low-growth era. Now it’s time to chart a long-term path for the Korean economy.