The beginning of a long war

The government has outlined its economic policy direction under the slogan of spurring growth through the private-sector and market.

The government has outlined its economic policy direction under the slogan of spurring growth through the private-sector and market. It will simplify the four-tier corporate taxation bracket and lower the maximum tax rate on richest companies from 25 percent to 22 percent. It will eliminate two existing regulatory rules upon making a new one under the so-called “one in, two out” guideline.

The new administration revived the mandate on “fiscal integrity” that had been largely disregarded under the previous administration. The new Yoon Suk-yeol administration vows to rationalize fiscal spending and seeks legislation to make public finance oversight legally binding. It will also reform the National Pension Service by the second half of next year.

The new government will wrestle with taxation revisions that had been stalled due to protests by stakeholders. The subsidies for local government education offices through automatic collection of 20.79 percent in domestic taxes for regional universities despite thinning student counts will be overhauled. The outdated Services Industry Advance Basic Act that outlaws for-profit medical institutions will be upgraded. Much of the reforms and amendments would require legislative reviews and approval. Since the corporate tax cut and other tax breaks would be undoing the policies of the past government, the new government and the People Power Party must persuade the Democratic Party that holds an overwhelming majority of the seats in the legislature.

But the new administration’s tax cut can contradict its plan to enhance public finance integrity. The outline reflects most of the campaign promises by President Yoon, including cuts in corporate tax and property taxes, suspension on capital gains from financial investment for two years, abolition of capital tax on the stock-riches, and lowering of stock trade tax. The plan has already drawn criticism about favoritism for wealthy companies and individuals.

Everyone likes a tax cut. But what the Yoon administration proposes could seem populist. Given the welfare demand to sustain the aging population, Korea would have to consider tax hikes. When the new administration has a long-term vision for public finance, it must include an incremental tax increase in its road map for long-term sustainability of public finance.

The U.S. Federal Reserve has yanked up the benchmark rate by 75 basis points, the steepest increase in 28 years. The Fed chair has hinted at another “big step” increase of 50 to 75 basis points in July, which would place the U.S. rates above Korea’s. The Bank of Korea may have to increase its rates at a bigger pace as a result. Authorities and market participants must become more vigilant against rapid capital flight and market instability. As the deputy prime minister for economic affairs said, a lengthy economic battle has only begun.