[2022 Economic Policy] 'Domestic Demand Recovery' Policies Poured Out... 'COVID-19 and Presidential Election' Variables (Q&A)

Lee Ok-won, First Vice Minister of Strategy and Finance (third from the left), and other government officials are conducting a detailed briefing on the "2022 Economic Policy Direction" at the Government Complex Sejong on the 17th. (Photo by Ministry of Strategy and Finance)

[Sejong=Asia Economy Reporter Son Seon-hee] On the 20th, the government announced next year's economic policy direction, presenting an economic growth forecast of '3.1%' for next year. To this end, various consumption activation measures such as expanding credit card income deductions and abolishing duty-free purchase limits were introduced. This is to boost domestic demand and drive economic growth during the economic recovery period.

However, variables such as the COVID-19 quarantine situation and the presidential election in March next year remain. In response to related questions, the government replied that it would "operate flexibly."

Next year's inflation rate is expected to be 2.2%. International oil prices are forecasted to follow a "high in the first half, low in the second half" trend, with the high oil price trend continuing from the second half of this year and gradually easing in the second half of next year.

Below is a Q&A session.

- It may be difficult to implement domestic demand recovery support measures depending on the quarantine situation. Is there a separate plan for worsening quarantine conditions?

▲ Lee Eok-won, 1st Vice Minister of the Ministry of Economy and Finance: The most concerning part is the situation where COVID-19 spreads. Such situations have already occurred this year. What we have prepared currently is a neutral stance, considering a gradual normalization process. In reality, it will likely vary depending on the quarantine situation and the development of COVID-19. We need to be flexible. However, since COVID-19 ultimately affects face-to-face service consumption, when looking comprehensively at exports and investment, we believe there will be no significant changes within the economic policy direction, which was made neutrally.

- What is the government's direction on 'stable management of public utility charges'?

▲ Vice Minister Lee: Ahead of winter, electricity and city gas charges can be a heavy burden from the perspective of prices for ordinary citizens. We think it is necessary to freeze electricity and gas charges during the first quarter winter season for various reasons, and under this principle, the consultation process among related ministries is nearing completion.

Public utility charges are not simply suppressed (increased) arbitrarily; the important thing is the timing distribution. If prices rise all at once at a specific time, the burden becomes very large and even expected inflation acts, so it is desirable to smooth (the inflation rate) as much as possible.

- Will the tax incentive for one-home owners as win-win landlords (residence requirement from 2 years to 1 year) encourage gap investment?

▲ Vice Minister Lee: It does not apply to those who newly engage in gap investment. Benefits are given to those who have newly signed contracts with rent increases within 5%, or those within 5% under the existing contract renewal request right.

- Why are tax supports for national strategic technology products and general products being implemented simultaneously?

▲ Ko Gwang-hyo, Director General of Tax Policy at the Ministry of Economy and Finance: Even for new facilities of national strategic technologies, considering the industry's reality where it is inevitable to produce products at lower technology levels in parallel for process optimization, we intend to apply tax credits to common facilities used concurrently in the production processes of national strategic technology products and new growth or general technology products. The specific application method will be announced during the revision of the tax law enforcement decree in January next year after collecting opinions.

- Omicron is spreading at the end of the year, so what is the background for this year's 4.0% growth forecast?

▲ Vice Minister Lee: There are about fifteen days left until the end of the year. Since the fourth quarter, domestic demand has improved, such as credit card sales, and exports have continued a steady increase. Considering the overall fiscal execution situation, we judge that achieving '4.0%' growth is not difficult due to the current situation.

- Regarding next year's 3.1% growth forecast, up to what level of interest rate increase was assumed?

▲ Vice Minister Lee: The impact of interest rates is ultimately on investment and consumption. We did not assume a specific (interest rate) level but looked at the overall trend and forecasted 3.1% growth. Other specialized institutions also consider the consensus base for next year's economic growth to be around the 3% range.

- When is the upward pressure on prices due to global supply chain disruptions expected to stabilize?

▲ Vice Minister Lee: We expect the inflation rate caused by supply factors to slow down next year. Agricultural, livestock, and fishery products have had good harvests, and although international oil prices nearly doubled this year compared to last year, they will significantly slow down next year. However, there may be increases from the demand side due to economic recovery.

▲ Kim Byung-hwan, Director General of Economic Policy at the Ministry of Economy and Finance: With Omicron spreading worldwide and concerns about factory shutdowns, there are uncertainties. Overall, we expect some easing, but the speed will not improve rapidly, and we forecast inflation accordingly.

- The abolition of the duty-free purchase limit seems to mainly benefit high-income groups with purchasing power for expensive goods.

▲ Director General Ko, Tax Policy: The duty-free purchase limit was established in 1979 to suppress consumption of overseas products and has applied only to domestic residents. It is a system operated only in Korea worldwide. Considering Korea's current foreign exchange reserves and economic scale, the original purpose of suppressing excessive consumption and preventing foreign currency outflow has largely faded. We expect to improve the problem where high-priced products had to be purchased overseas due to low purchase limits and to revitalize the duty-free industry by converting overseas consumption to domestic consumption.

Since taxes are normally paid on amounts exceeding the duty-free limit ($600) for overseas travelers, it is difficult to say that benefits are given only to certain groups.

- More than a month has passed since the fuel tax cut was implemented. What is the analysis of its effects? There are also criticisms that it contradicts carbon neutrality.

▲ Han Hoon, Deputy Vice Minister of the Ministry of Economy and Finance: Initially, the reduction effect appeared immediately mainly at budget gas stations and directly operated gas stations. For existing privately operated gas stations, it takes some time because they maintain previous prices until the fuel they had purchased is sold. According to data from the Ministry of Industry, the fuel tax cut is now fully reflected.

▲ Vice Minister Lee: Carbon neutrality is a process to be promoted step by step, so we do not see the fuel tax cut as contradicting the overall trend. It is about how to buffer the burden of rapidly rising (oil) prices immediately.

- Is there a plan to discuss raising the working-age population currently capped at 64 years old?

▲ Deputy Vice Minister Han: This issue is closely connected not only to elderly social participation but also to various welfare systems, so it cannot be decided immediately. Social discussions need to begin. When the 4th Population Task Force is launched next year, we plan to consider this as a focused discussion agenda.