[Inside Chodong] Small Business Owners and the Self-Employed Suffering from Low Income and Debt, Urgent Need for Substantial Support Measures

Every time I see neighborhood stores with signs saying "Tearful Closing Sale," I truly feel the biting wind of the economic downturn. It is the desperate cry of small business owners and self-employed individuals who say they simply cannot endure any longer. According to data from the National Tax Service, while about 1,147,000 sole proprietors opened their businesses last year, 910,000 closed theirs. The closure rate stands at 79.4%.

"Instead of getting a job, maybe I should open a cafe," "If I use my severance pay and take out a loan to start a business, I think I could earn more than my previous salary. Maybe I should take this chance to become a boss." I sincerely hope no acquaintances around you are making such casual remarks.

Statistics also show a decrease in the number of self-employed individuals. According to Statistics Korea on the 30th of last month, the average monthly number of self-employed people from January to August this year was 5,636,000, accounting for only 19.7% of the total employed population of 28,544,000.

Considering Korea’s economic growth journey, which has shifted from agriculture, forestry, fisheries, and small-scale commerce to manufacturing and large corporations, it is not surprising that the number of self-employed workers is decreasing while wage workers are increasing in the labor market. When related statistics began in 1963, self-employed individuals made up 37.2% of total employment, but their share has steadily declined since then.

However, this is the first time the proportion has fallen below 20%. Statistics Korea interprets this as a result of structural industrial changes combined with recent domestic demand sluggishness. Fewer people are trying to start businesses, and more stores that are open are closing down.

According to the Financial Stability Report released by the Bank of Korea on the 26th of last month, as of the end of the second quarter this year, the outstanding loans to self-employed individuals amounted to 1,060.1 trillion won, with 3.126 million borrowers.

The problem is not only the enormous scale of the debt but also that loans to low-income borrowers (bottom 30% of annual household income) and low-credit borrowers (NICE credit score of 664 or below) reached 132.3 trillion won and 42.4 trillion won, respectively, which increased by 7.1 trillion won and 10.1 trillion won compared to a year ago.

“Vulnerable self-employed” individuals who are multiple debtors and either low-income or low-credit number 410,000, accounting for 13.1% of all self-employed borrowers. The outstanding loans they are unable to repay increased by 12.8 trillion won year-on-year to 121.9 trillion won. This represents 11.5% of the total loans to self-employed individuals.

A significant portion of domestic self-employed businesses are livelihood startups, and they face the "three highs" crisis of high interest rates, high inflation, and high exchange rates, along with issues such as fees and delivery charges imposed by large platform companies. Business needs to improve and income must increase for them to have the capacity to repay debts, but there is no sign of improvement.

According to data submitted by the National Tax Service to Park Seong-hoon, a member of the National Assembly’s Planning and Finance Committee from the People Power Party, on the 22nd of last month, among 11,464,368 personal business comprehensive income tax filings in 2022, 75% (8,609,018 cases) reported monthly incomes below 1 million won (annual 12 million won), and 8.2% of these reported "zero income."

In response to this situation, the government announced a "Comprehensive Plan for Small Business Owners and the Self-Employed" in July, which included measures such as extending loan repayment periods by up to five years, supporting low-interest refinancing loans, providing special electricity fee support for small business owners with annual sales under 60 million won, and extending tax support for benevolent landlords until the end of next year. However, these measures do not seem to have provided substantial help.

The government plans to announce additional measures in mid-this month, and it is hoped that these will be crafted by considering all possible policy tools, including interest rate cuts and bold fiscal spending.