The Korea Herald


S. Korea to inject 40.7 tln won for economic recovery

By 이현정

Published : July 24, 2014 - 11:35

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South Korea plans to implement a macroeconomic policy package worth about 40.7 trillion won (US$39.7 billion) to kick-start an economic recovery beset by anemic domestic demand, slowing exports growth and deepening uncertainties at home and abroad, the finance ministry said Thursday.

The government will also execute its macroeconomic policy in an "expansionary" manner until its intended impact materializes, the ministry added. The stance will be maintained when drawing up a budget for next year as well.

The measures are a part of the government's economy management plan along with other broad policy directions unveiled on Thursday, with newly inaugurated Finance Minister Choi Kyung-hwan and his economic team serving as the leaders.

"We will run our fiscal stance in an expansionary manner during the second half and in 2015 so as to consolidate the base for the economic recovery," the ministry said. "The expansionary stance will be in place until its impact materializes."

The government plans to inject 40.7 trillion won as part of what it calls a macroeconomic policy package consisting of fiscal, financial, tax and regulatory reforms. Of the total, 21.7 trillion won will be spent during the second half of this year, according to the ministry.

In terms of fiscal support alone, the government will inject 11.7 trillion won during the second half, which it expects will help raise the country's gross domestic product by 0.1 percentage point in 2014 and another 0.1 percentage point in 2015.

The plan comes on the backdrop of grim outlooks that the Korean economy might be slipping into a protracted low growth trend in the face of toughening situations at home and abroad. Reflecting the risks, the government on Thursday revised downward its growth outlook for this year to 3.7 percent from 3.9 percent.

"Our economy now stands at a critical crossroads between making a leap forward and falling into a recession. A slump in domestic demand is deepening, and the economy is losing its momentum," Choi said. "The new economic team will do its utmost to break this slumping domestic demand cycle and stabilize people's livelihoods."

Of 21.7 trillion won set aside for the second half of this year, 8.6 trillion won will be used to help low-income people purchase homes, support small businesses and help the tourism industry.

The government will give an additional 10 trillion won as policy financing for small businesses through state-run banks. About 16 trillion won worth of support related to foreign currency and other kinds of a macroeconomic policy mix will also be provided.

Choi decided against an extra budget that many experts and some government officials earlier asked for to revitalize the stalling economy.

He said that economic conditions are serious enough to warrant a supplementary budget for this year, but admitted that it would be tough to prepare one given the country's fiscal conditions and procedural problems such as a parliamentary approval that could delay actual money injection into the economy.

Another pillar of the economy management plan is to expand household income by boosting overall job creation. Finance Minister Choi has said that an increase in disposable household income is a key element in strengthening slumping domestic demand.

To that end, the government said it will introduce tax schemes to induce companies to raise the salaries of their employees, such as providing tax deductions for businesses that raise pay at a higher rate than the average of the three previous years. This scheme will be temporarily effective until 2017.

The government also plans to introduce a tax system that encourages companies to use a certain amount of future profits on salaries and dividend payments, a move that it expects will result in corporate money streaming to households and investors.

To tackle the growing household debt problems, the government said that it plans to "normalize" housing loans regulations such as loan-to-value (LTV) and debt-to-income (DTI) rules that control the amount of loans for home buyers based on their income and ability to pay back debts.

Currently, LTV, which differs depending on where the home is located and where people apply for loans, will be adjusted to 70 percent, meaning that they can receive loans up to 70 percent of home value. DTI will also be adjusted to a uniform rate of 60 percent.

This so-called "normalization" lending regulations are meant to be the main drivers in rescuing the housing market by making it relatively easier for people to borrow money for home purchases. (Yonhap)