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Economic Policies, H2 2021

  • DivisionEconomic Policy Bureau - Economic Policy Division
  • DateJune 28, 2021

Economic Policies, H2 2021

 

 

I. Background

 

Although the economy showed a fast rebound in the first half of 2021 and the momentum will likely continue for the rest of the year, it has to deal with imbalances occurring during the recovery and post-pandemic restructuring in the 2nd half.  Exports and investment being strong, employment and domestic consumption are expected to pick up at a relatively slow pace, restricting the income recovery among working households.  In addition, there is a chance that the economy will be hampered by ramifications accompanying the recovery, such as rising inflation and aftermath of soaring asset prices. 

 

The economy also has to deal with longer-term and global issues in the 2nd half.  As the post-pandemic restructuring is expected across the globe, which may completely change the way we live, from working and doing business to managing everyday lives, the economy has to be prepared for such challenges with industrial innovation and new growth engines.  A low-carbon economy being actively sought globally, Korea is to be well prepared for the new global order for its exports and enterprises to fare well in the global market.  With regard to demographic challenges posed by plummeting birthrates, the country needs to find right solutions to keep its growth potential intact. 

 

Against this backdrop, the 2nd half economic policies of 2021 have been drawn up.

 

II. 2021-2022 Outlooks

 

2021 Outlook

 

  • Growth:  Annual growth of 4.2 percent is expected.  Exports being strong, the government will work to boost private spending, particularly in the local market.
  • Employment:  The economy is expected to add 250,000 jobs, more than offsetting last year’s decline of 220.000. 
  • Inflation:  The annual consumer price inflation is projected to be 1.8 percent, supply situations improving and price policies shifting to curbing inflation.
  • Current account balance:  Current account surpluses are expected to expand to US$ 77.0 billion with goods account surpluses continuing and services balance improving. 

 

 

2020

2021

2022

Revised

Original

GDP growth (%)

-0.9

4.2

3.2

3.0

Employment growth (thousand)

Employment rate (%, aged 15-64)

-218

65.9

250

66.4

150

65.9

250

66.8

Consumer price inflation (%)

0.5

1.8

1.1

1.4

Current account (US$ billion)

Exports (y-o-y, %)

Imports (y-o-y, %)

75.3

-5.5

-7.1

77.0

18.5

22.4

63.0

8.6

9.3

66.0

3.8

3.0

 

2022 Outlook

 

  • Growth:  The economy is expected to grow 3.0 percent amid pent-up demand, as well as backed by strong exports due to recovering emerging markets.
  • Employment:  A total of 250,000 jobs are expected to be added, despite falling working age population, thanks to strong services.
  • Inflation:  Consumer prices are expected to rise 1.4 percent, supply side pressure projected to ease.

 

III. 3+2 Framework of Economic Policies, H2 2021

 

The government has set 3+2 goals for the second half:  Three aim to help the economy rebound completely from the pandemic, and the other two directed towards economic restructuring for the future.  The 3+2 framework is as follows.

 

Three to support a strong rebound

 

One: Fast and strong recovery

 

Maintain expansionary macroeconomic policies to help grow over 4 percent in 2021, employing section-specific measures, such as those to boost domestic consumption, investment and exports

 

1. Work for the economy no longer to be affected by the pandemic

 

  • Keep fiscal policies expansionary, including the 2nd extra budget, to help achieve strong and inclusive growth
  • Maintain the easy monetary policy, paying attention to the risk of financial imbalance
  • Work on the orderly withdrawal of pandemic support, including giving grace period or extension, continue corporate bond purchases until year-end and expand loans for low income households to 2.0 trillion won
  • Accelerate COVID vaccine rollouts
  • Draw up plans to promote COVID vaccine development and production

 

2. Boost consumption

 

  • Promote spending on culture and leisure activities to help pandemic-hit sectors take advantage of pend-up demand, such as through coupons, vouchers and gift certificates
  • Promote the Korea Sales Festa and plan other nation-wide sales events for small businesses
  • Continue with the three fiscal support to promote spending:  Income tax deduction for extra spending, 30 percent tax cut for car purchases and the payback of up to 300,000 won for energy-efficient home appliance purchases
  • Promote tourism:  Use travel bubbles for international tourism and provide public transportation discount for local tourism

 

3. Promote corporate investment

 

  • Work to improve communication with industries, draw up industry-specific plans and continue with the 110 trillion won corporate investment project
  • Increase tax and financial support, and other incentives to promote investment in strategic technologies, such as semiconductors, secondary batteries and vaccines, as well as launch a support package worth more than 2 trillion won to help start new investment in strategic technologies
  • Expand reshoring support
  • Work on deregulation to approve new technologies or businesses, which have been proved successful in regulatory sandboxes

 

4. Help exports surpass US$ 600 billion

 

  • Help find solutions to shipping container shortages, such as by providing extra shipping capabilities and shipping vouchers
  • Increase export financing, including 125 trillion won planned in the 2nd half and extension of guarantees provided by state-owned financial institutions
  • Promote corporate participation in overseas projects, such as through EDCF and other international development finance cooperation

 

5. Promote local economies

 

  • Continue to run support packages for pandemic-hit regions
  • Work on local development through the Korean New Deal programs, including those led by local governments
  • Extend the regulation free zones, which are otherwise to expire this year

 

6. Strengthen risk management

 

  • Keep the household debt increase under control at a 5-6 percent rise, and introduce a low interest rate loan program eligible to low income earners
  • Work to stabilize housing prices by increasing supplies and favoring non-speculative purchases in terms of taxes and financing
  • Prepared for rising inflation and monetary policy changes in major economies

 

Two: Help with recovery in working households

 

Work for the recovery to be felt by working households, such as through employment and small business support, and measures to stabilize consumer prices

 

1. Promote job creation and retention through fiscal programs

 

  • Support as many as 150,000 job creation in high-tech areas, such as AI and SW, as well as in the pandemic-hit leisure service sector, with the focus on young adults
  • Work to make more effective the current employment support programs

 

2. Help small businesses and enterprises with their efforts to recover

 

  • Provide an extra support package, which will be financed with the 2nd supplementary budget
  • Expand support for those wanting to close business, or retry after failure, including the new tenant rights to terminate leases if the business is affected by social distancing for more than three months
  • Expand the 2021 loss deduction on income tax to include 2019, in addition to 2020, available to small enterprises
  • Introduce ‘community crowdfunding’, in which neighbors invests in local businesses

 

3. Prepare for rising inflation in a way to help working households

 

  • Work to avoid supply-side pressure, particularly in fresh food and steel prices
  • Increase fresh food vouchers, and expand housing and communications cost support

 

Three: Inclusive recovery

 

Help the economy recover from ‘corona divide’ by providing sector-specific support, strengthening social safety nets, including employment security

 

1. Support young adults and low-income earners

 

  • Provide young adults with a support package which covers jobs, housing and asset-building
  • Work to narrow gaps in income, education and childcare, such as by helping mothers with their efforts to be reemployed, introducing low income artist support, drawing up plans to help bridge education gap deepened amid the pandemic, and expanding daycare services

 

2. Strengthen social safety nets, including employment security

 

  • Work towards the Korean New Deal goals for employment security and social safety nets, which include employment insurance covering all citizens and expanded unemployment benefits
  • Strengthen current social security programs, such as basic livelihood support, pandemic support for low income households, energy vouchers and healthcare support
  • Expand loans available to low income earners

 

3. Promote sharing and fair business practices

 

  • Encourage sharing, including charitable donations
  • Protect small enterprises:  Work to stop technology theft and ensure payment for goods and services provided

 

 

Two directed towards economic restructuring for the future

 

One: Develop new growth engines

 

Work to accelerate the Korean New Deal projects, help develop new growth engines, and promote innovation and ventures

 

1. Work to accelerate the Korean New Deal projects

 

  • Invest a total of 22.5 trillion won over 2021 in the 10 major Korean New Deal projects, such as those related to big data, clean energy and future mobility
  • Work on regulatory reform to help introduce new businesses, including making the 10 New Deal bills into law
  • Promote private funding of New Deal projects, such as through expanded tax incentives and government pump priming for the purpose (more than 17.5 trillion won in 2021)

 

2. Develop future growth engines

 

  • Provide strong fiscal and tax support for BIG3[1], including tax breaks for eco-friendly car purchases and R&D support for auto semiconductor development, promote next generation batteries, and work to achieve vaccine independence
  • Help develop DNA[2]-based new businesses and innovative services, such as the use of big data in healthcare services, and revise the law on personal data protection to promote a data economy
  • Support the five sectors with bright future:  Cloud computing, blockchains, intelligent robots, healthcare and metaverse

 

3. Promote innovation in major manufacturing and support services of the future

 

  • Draw up a plan for ‘carbon neutrality in production’ to accelerate eco-friendly manufacturing
  • Continue with the policies on ‘high-tech manufacturing materials, parts and equipment’, aimed at creating a stable supply chain at home
  • Further develop a ‘one step forward’ model, a guide to help resolve conflicts between new businesses and existing businesses when new services are introduced, as well as work to enact the Framework Act on Services Development
  • Encourage content industries, including games and cultural contents

 

4. Continue to promote ventures

 

  • Allow corporate venture capital (CVC) and multiple voting rights, as well as strengthen government’s venture support programs, such as scale-up funds and those to encourage overseas business activities, all of which will be financed by the 2nd supplementary budget
  • Work on the details of high-tech venture support, from eligibility to procedures for receiving it, to more effectively provide support

 

5. Develop qualified human resources

 

  • Estimate a mid- to long-term demand for high-tech labor force, such as SW experts and semiconductor professionals, and provide support according to the estimate
  • Build a high-tech human resources management system in which labor force information can be accessed and according to which training programs can be developed
  • Encourage cooperation between industries and universities

 

Two: Prepare for changes in the future

 

Work towards the 2050 carbon neutrality, help with corporate business restructuring, prepare for demographic changes, and work on labor market restructuring and fiscal restructuring

 

1. Work on the transition to a low-carbon economy

 

  • Work to achieve the 2050 net zero, such as drawing up framework strategies to reach the goal, founding a legal basis and launching climate response funds
  • Draw up the country’s ESG guidelines, build an ESG information platform and provide incentives for businesses with good ESG scores
  • Encourage the use of clean energies, such as by accelerating the offshore wind power project, promoting the corporate use of renewable energies and electric vehicles, and work to build a hydrogen economy
  • Prepare for the carbon border adjustment, such as through a carbon price system

 

2. Help with corporate business restructuring

 

  • Promote public-private business restructuring partnership
  • Launch a business restructuring fund worth 50 billion won, along with programs to help with business restructuring
  • Expand M&A fund of funds to 0.2 trillion won, as well as tax incentives
  • Work on the supply of proper labor force, such as through retraining, as restructuring brings changes in labor force demand

 

3. Work to address demographic challenges

 

  • Introduce five packages to increase birthrates, including paid childcare leave and public daycare services
  • Prepare for aging population, such as developing senior markets and promoting elderly employment

 

4. Work on the transition to a more sustainable economy

 

  • Work on the reforming of the labor sector:  Help implement the 52 hour workweek, as well as draw up wage peak guidelines for the public sector
  • Work to increase fiscal spending efficiency:  Merge similar projects and increase the purchases of innovative products
  • Work to improve the management of public institutions:  Strictly evaluate their social responsibility performance and raise financial soundness standards
 

[1] A-system-on-a-chip, biohealth and future cars

[2] Data, network and AI

 

Please refer to the attached pdf

 

Ministry of Economy and Finance
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