Economic Policies, H2 2019

 

 

Background

 

With global economic conditions worsening and semiconductor markets expected to remain weak, the economy, over the second half, will have to deal with uncertainties surrounding global trade, as well as slowing investment at home.  Although employment continues to improve since February this year backed by the service sector, manufacturing jobs have yet to pick up and it appears that there should be an innovation in the country’s manufacturing sector.  The economy also has to be prepared for demographic changes which will pose challenges in the future.

 

2019 Outlook

 

- Growth:  Annual growth of 2.4 – 2.5 percent is expected, a downward revision from the original outlook made at the beginning of the year (2.6 % - 2.7 %).  Exports and investment are projected to slow down, and growth will be supported by supplementary budgets, as well as by measures to boost exports and investment. 

- Employment:  A total of 200,000 jobs are expected to be added to the economy, the employment rate improving from 66.7 percent to 66.8 percent.

- Inflation:  The annual consumer price inflation is projected to be 0.9 percent due to low oil and fresh food prices.

- Current account balance:  Current account surpluses are expected to decline to US $60.5 billion amid slowing exports.  Service balance is expected to improve somewhat.

 

	2018	2019	2020
GDP growth (%)	2.7	2.4 – 2.5	2.6
Employment growth (thousand) Employment rate (%, aged 15-64)	97 66.6	200 66.8	200 67.0
Consumer price inflation (%)	1.5	0.9	1.5
Current account (US $billion)	76.4	60.5	63.5

 

Framework for Economic Policies, H2 2019

 

The government will pursue the three pillars over the second half:  Boosting the economy, restructuring industries and seeking inclusive growth.  The framework is as follows:

 

1. Boost the economy

 

- Promote investment

- Increase domestic demand

- Boost exports

- Encourage local economies

- Strengthen risk management

2. Restructure industries

 

- Step up ‘innovation-led growth’ efforts

- Work for the industrial innovation-promoting policies to produce outcomes

- Work on manufacturing innovation

- Work on further developing the service sector

- Prepare for demographic challenges

 

3. Seek inclusive growth

 

- Strengthen social safety nets

- Expand support for young adults

- Expand financial inclusion

- Work on fair business practices

- Improve the minimum wage system and 52-hour maximum working week

 

Second Half Economic Policies

 

1. Boost the economy

 

The government will put its first priority on promoting investment and properly managing internal and external risks.

 

- Continue with expansionary fiscal policies

 

1) Work to spend fiscal stimulus as planned

2) Work to spend at least 70 percent of the supplementary budget over the first two months upon its passage in the National Assembly

 

- Promote investment

 

1) Temporarily expand tax incentives for corporate facilities investment to up to 10 percent for one year after the revision takes effect, and extend the corporate tax reduction for facilities investment, scheduled to end this year, to 2021 and the accelerated depreciation for 6 months to the end of 2019, or the end of June 2020 for special deduction

2) Help launch construction projects worth more than 10 trillion won in the second half:  corporate projects worth 8.0 trillion won and SOC projects worth around 2.0 trillion won

3) Promote local governments’ construction projects, such as urban renewal projects, community SOC projects, public transportation projects and infrastructure maintenance

4) Provide more than 10 trillion won worth of financial support, including one trillion won worth of on-lending by Korea Development Bank, to promote corporate facilities investment in new industries, such as a system on a chip, bio-health and future cars,

5) Increase reshoring incentives and encourage participating in PPP projects (private investment in public projects)

 

- Increase domestic demand

 

1) Extend the individual consumption tax cut for car purchases to the end of this year and for hydroelectric cars to the end of 2022, and temporarily give individual consumption tax cuts when scrapping old cars (more than 15 years old) and buying new ones (not applicable to diesel cars) for six months after the revision is passed

2) Organize large-scale sales events, such as Korea Sales FESTA, launch an online sales platform for self-employed merchants, refund 10 percent of the prices when buying energy-efficient home appliances, run a pilot Online to Offline Market through which consumers purchase products they found online at offline markets after checking the products, and raise the duty free shop purchase ceiling for Koreans to US $5,600

3) Develop tourism for locals, such as a variety of tour programs and passenger rail programs

4) Work to attract foreign visitors:  Work to regularly hold the K-culture festival every fall, promote tax-free shops and raise the on-the-spot tax refund ceiling to 2 million won, work to develop medical tourism, and streamline the visa-free entry procedure for cruise ship by adopting QR codes

 

- Boost exports

 

1) Run a government-wide export support system and draw up measures that will be focused on diversifying markets through trade deals and expanding export items to services, contents and K-culture

2) Expand financial support by 7.5 trillion won, new export engines being major recipients, such as rechargeable batteries, bio-health products, electric cars and OLED, launch 2.5 trillion won worth of facilities investment support funds for exporters, and spend 300 billion won out of the 1.5 trillion won overseas construction support funds to help Korean builders go overseas

3) Expand the refund of tariffs on imported materials, which is given to exporters if they use the materials to produce export goods, to all items imported by SME exporters

 

- Encourage local economies

 

1) Increase support:  Launch local development funds worth five trillion won to be invested in urban regeneration, old industrial complex renovation and tourism development, raise 100 billion won worth of local funds to be invested in local ventures

2) Support corporate investment in the region where an agreement has been reached between the management and labor on an employment model most fit for them

3) Work on balanced national development, 23 projects worth 24.1 trillion won being reviewed

 

- Strengthen risk management

 

1) Work to ensure housing market stability

2) Strengthen household debt risk management:  Expand the DSR (debt service ratio) requirement to nonbank financial institutions and build a system to monitor the financial sector in relation to its exposure to the real estate sector

3) Help corporate restructuring:  Increase corporate restructuring funds by one trillion won to two trillion won and make it first available to car manufacturers, shipbuilders and machinery industries, increase investment in nonperforming loans (NPL) by Korea Asset Management Corporation (KAMCO) to promote private investment in NPLs, and increase financial support for restructuring through KAMCO

4) Be prepared for escalating trade tensions:  Strengthen preparedness for US-China trade conflicts and provide companies affected with consulting services to help them explore new markets, as well as with loan modifications and other financial support

 

2. Restructure industries

 

The government will seek industrial innovation in both manufacturing and services with its focus on new industries and ventures.  In addition we will work on mid- to long-term economic policies, taking into account demographic challenges in the future.

 

- Work on the Innovation 2.0 to hold up innovation-led growth:  Announce the Innovation 2.0 in July, which will cover plans to develop new industries, promote business convergence, support R&D for future demand and grow human resources

 

- Work for the industrial innovation-promoting policies to produce outcomes

 

1) Work to successfully implement the policies to develop a platform economy, such as building big data platforms, providing AI education packages and supplying around 5,000 hydrogen fuel cell cars, expand support for the eight most promising industries to 12 industries including smart factories, new energies and intelligent robots

2) Work to launch as many as 100 businesses under regulatory sand boxes and provide them with financial and consulting services, and select regions for regulation-free zones in the second half

3) Promote venture capital:  Extend the corporate tax deduction for investing in venture stocks for three years to the end of 2022

4) Expand R&D tax incentives for the 173 new growth engines and source technologies to cover biobetters and a system on a chip, the tax incentives made to be carried over for up to 10 years

5) Draw up a new public procurement system favoring new and innovative products

6) Strengthen startup support:  Raise more than 3.2 trillion won worth of funds to support tech startups and venture scaleups, provide agtech with 100 billion won support, make 110 billion won guarantees available for unicorn hopefuls and startups with angel investment, and launch a ‘Future Unicorn 50’ project by the end of 2019 to grow ICT enterprises

 

- Work on manufacturing innovation

 

1) Seek smart and environment-friendly manufacturing, as well as promote industrial convergence

2) Work to develop new industries into major growth engines, and promote innovation in major industries

3) Draw up industry-specific plans to accelerate innovation, invest in technologies essential to produce the 100 most important materials and components, and announce measures in September to grow the food industry

4) Launch a 2.5 trillion won loan program to support business operation costs, available to SMEs in major industries and new industries

 

- Work on further developing the service sector

 

1) Work to provide the service sector with the same level of fiscal, tax and financial support as manufacturing has had, and promote R&D, service standardization and service-manufacturing convergence

2) Work to develop logistics industries and draw up plans to grow content industries

 

- Prepare for demographic challenges

 

1) Work to adopt short-term solutions, such as encourage enterprises to keep employees past the retirement age, work to attract foreign talent, and shorten the long-term fiscal forecasting from 5 years to 3 years to reflect fast changing demography

2) Announce in December mid- to long-term policies to tackle demographic challenges, which will include plans to improve living quality, raise growth potential and boost productivity

 

3. Seek inclusive growth

 

The government will increase its employment support and strengthen social safety nets, helping young adults with climbing the social ladder and playing the role of supporting the market.

 

- Strengthen social safety nets

 

1) Expand government employment programs for low-income households, including the elderly

2) Expand the job training support to all employees, including the self-employed, which provides 60-70 percent of costs incurred over five years up to 5 million won

3) Provide SMEs with tax exemption for interests earned from loans arranged to their employees who want to buy or rent a house

4) Expand basic social insurance recipients by revising asset and income evaluation 

5) Work to protect those outside the industrial accident compensation insurance, including platform workers, by developing personal accident insurance fit for them

6) Continue to work to reduce cost of living, such expenses as housing, transportation, education, healthcare and communications

7) Improve small merchant support:  Increase startup education centers by three in the second half to a total of 9 and strengthen education programs provided there, such as by adding field experience, and issue up to 2.3 trillion won worth of gift certificates to be used at small merchants’

 

- Expand support for young adults

 

1) Encourage businesses to hire young adults by increasing government’s employment support given to companies for hiring young adult employees

2) Help young adults climb the social ladder: Expand scholarships given to young SME employees, and continue to promote creativity and entrepreneurship among young adults, such as by expanding startup loans and young adult startup funds

 

- Expand financial inclusion

 

1) Work to extend the tax-free savings account, scheduled to expire at the end of 2019

2) Announce measures to increase financial inclusion in the second half, which will include asset-building support for low income households and consumer-friendly finance

 

- Work on fair business practices

 

1) Announce measures in November to promote cooperation among business partners and help fix unfair business practices

2) Encourage competition in the market and closely monitor business practices violating antitrust laws

 

- Improve the minimum wage system and 52-hour maximum working week

 

1) Help improve the minimum wage system, taking into consideration economic conditions, its influence on the labor market, corporate burden and whether the market can afford the wage system

2) Work for the 52-hour working week to settle, making revisions to it where necessary

3) Work to develop a job-based wage system and give incentives to companies which adopt a job-based wage system