Shortsighted measures to boost consumption

Self-employed owners of beauty salons at a neighborhood traditional market, corner restaurants and karaoke establishments are breathing a sigh of despair. They all say business is so sluggish and complain that consumers have tightened their belts and are not spending at all. Amid the protracted fiscal crisis in Europe, the Korean economy, which is highly dependent on foreign markets for growth, will unlikely see improvement anytime soon just like the global economy. Korea is considered to be faring better than other countries, but is still in a deep slump.

The government on Monday held a fifth contingency meeting to revitalize the economy and announced a plan to shore up domestic consumption and revive the real estate market. The Korean economy grew just 2.3 percent year-on-year in the first half, so the government’s annual growth target of the 3-percent level for this year is virtually impossible. Several foreign investment banks have lowered Korea’s growth target for the second half to 1.6 percent. The government also held an "intensive private-public sector joint forum" in August, which was further dubbed “an endless debate to find solutions,” chaired by the president in person. The string of measures announced included the easing of regulations on debt-to-income ratio for restricting mortgage loans, lifting the ceiling on sale prices for new apartments, and revocation of a heavier transfer tax on owners of multiple homes. They, however, have hardly helped revive the economy.

In the latest batch of measures, the government announced additional fiscal stimulus of 4.6 trillion won (4.1 billion U.S. dollars) by year’s end through tax cuts and fiscal investment. The most significant action in the state assistance plan is the reduction of monthly collection of income tax, meaning tax revenue will fall by 1.5 trillion won (1.3 billion dollars) this year. But this is just a cheating plot designed to get consumers to spend more because tax returns will be reduced early next year. It is also doubtful if the planned reductions of transfer tax and acquisition taxes worth 700 billion won (620 million dollars) on real estate transactions will help since the cause of the real market slump is not taxes. The measure that sounds most appealing is the cut in excise taxes on cars and large electronic appliances. But this will only cut taxes by 100 billion won (89 million dollars).

Domestic demand is comprised of consumption and investment. If Korea seeks to galvanize domestic demand, it should, more than anything, induce companies to invest and add jobs and thus expand disposable income. Only this will bring about structural revival of consumption. The government has announced five rounds of measures, but whether these can boost domestic demand is questionable because of a lack of strategy to promote investment, the key to expanding demand.

Discovering new growth engines and deregulating the high value-added service industry, including medical services and healthcare, financial services, human resources, information, knowledge, tourism and education, are the most effective measures to shore up the economy and increase domestic demand. Even before its inauguration, the incumbent government pledged to galvanize the service industry, but has failed to build an international hospital in the Incheon Free Economic Zone. Worse, it has banned large discount stores from opening Sundays or holidays, and is taking the opposite path of a purported logistics revolution, price stabilization, consumer benefits and job creation. The government has presented a long list of measures aimed at galvanizing the economy, but deserves blame for taking stop-gap actions as the measures lack key elements.