[Red Light on Domestic Demand] Recommendations from 5 Economists... To Revive Consumption, Support the Middle Class and Vulnerable Groups and Pursue 'Structural Reform' Simultaneously

20% additional deduction on card usage in the first half of the year, 70% reduction in individual consumption tax for replacing old cars, distribution of 450,000 accommodation coupons, etc. Among the numerous measures introduced by the government this year to stimulate domestic demand in its economic policy direction, these are considered 'killer measures.' However, economists pointed out that these alone are insufficient to revitalize domestic consumption. There are also criticisms that these measures are akin to 'cutting one's own flesh.' They argued that lowering the tax burden on the middle class and expanding welfare for vulnerable groups to compensate income, while enhancing the employment capabilities of young people resting at home, are necessary to lead to consumption activation.

In a phone interview with Asia Economy on the 11th, five economists generally agreed that the government's consumption stimulation measures introduced in this economic policy direction are not enough to revive consumption weakened by high inflation and high interest rates.

They said the measures have a strong temporary subsidy distribution nature. Professor Jeong Se-eun of the Department of Economics at Chungnam National University said, "The consumption effect of (the economic policy direction) is 'questionable.' People who intended to buy a car will weigh the timing and then buy, but those who had no intention to buy at all will not buy just because the price is slightly reduced." He also pointed out, "No one consumes more just to get more tax credit benefits from credit card tax deductions."

Professor Yang Jun-mo of the Department of Economics at Yonsei University also said, "People do not increase consumption just because taxes are temporarily reduced or subsidies are given," adding, "Giving subsidies means collecting taxes and then giving them back, so giving allowances or travel vouchers is like cutting one's own flesh."

There was also criticism that stimulating domestic demand and stabilizing prices are incompatible tasks. Professor Seok Byung-hoon of the Department of Economics at Ewha Womans University said, "The current policy simultaneously presents conflicting measures to stimulate domestic demand and stabilize prices," expressing concern that "if domestic demand stimulation measures are used when price control is necessary, prolonged high inflation could lead to a longer recession."

There were opinions that government consumption stimulation measures are necessary to prevent recession. Professor Choi Cheol of the Department of Consumer Economics at Sookmyung Women's University said, "When consumption sentiment is depressed, economic agents excessively control consumption even when it would be appropriate to consume, leading to a vicious cycle of economic downturn," adding, "The government's role now is to carefully remove transaction costs and create conditions for more price stability in the market through tax aspects, supply, and quantity adjustments so that consumption depression sentiment does not have a worse impact on the economy."

Economists emphasized that more fundamental measures are needed to stimulate consumption. Professor Jeong said, "We need to control major expenses in people's lives such as communication fees, transportation costs, and rent," adding, "To stimulate consumption, income compensation is ultimately necessary, and in response to significant price increases, welfare expansion such as increasing child allowances should be implemented."

Professor Yang diagnosed that the disposable income of the 'middle class,' the backbone of consumption, is important. He suggested, "More specifically, a 'tax reform for the middle class' is needed," and "The tax burden on the middle class should be boldly reduced to increase their real disposable income, and various charges should also be significantly lowered."

On the 16th, a rental notice is posted at a store in Insadong, Jongno-gu, Seoul. Photo by Jin-Hyung Kang aymsdream@

Professor Seok said that measures are needed for the increasing number of NEETs (Not in Education, Employment, or Training - young people unwilling to work) among the youth, who are in their most active consumption period. He said, "In a situation where the increase of NEETs is becoming a serious social problem, policies to enhance the employment capabilities of young people would be timely." He also stated that price control should be the top priority in the first half of the year, while policies to prevent unnecessary economic recession due to price declines should be focused on in the second half.

Professor Choi urged that policies focus on the 'vulnerable groups.' He said, "If economic difficulties persist for a long time, the relative pain and hardship experienced by vulnerable groups increase," and suggested, "The government should more closely examine whether vulnerable households are struggling and use such data to approach welfare or finance, ensuring that no one is left in blind spots by monitoring these areas more thoroughly."

Professor Kang Sung-jin of the Department of Economics at Korea University also emphasized support for vulnerable groups. Professor Kang said, "To stimulate domestic demand, interest rates fundamentally need to be lowered, but an immediate shift in monetary policy is difficult," adding, "Therefore, the government's policy direction should focus more on supporting low-income and vulnerable groups who suffer the most pain, such as through electricity bill reductions or freezing public utility fees."

There are many concerns that if low consumption caused by high inflation is left unchecked, the economy could fall into a vicious cycle leading to a long-term recession like Japan's 'Lost 20 Years.' Experts raised their voices that overcoming this requires structural changes such as building a high value-added growth structure and preparing an open immigration policy, rather than short-term methods like giving subsidies to increase consumption.

Professor Yang said, "If this system is maintained as is while the population decreases, we will fall into a low-growth trap," adding, "Instead of implementing subsidy policies, the focus should be on creating a dynamic economy where companies like Samsung and Hyundai can be created again."

Professor Kang emphasized that "unlike Japan, we can avoid long-term recession." He said, "By actively accepting foreign workers through an open immigration policy (to resolve the production cliff) and easing regulations to foster advanced industries, appropriate policy management can prevent long-term recession," and predicted, "Since our external dependence is higher than Japan's, if such policy shifts are achieved, we will not experience a long-term recession like the Japanese economy."