[Exclusive] Finance Ministry Prepares New Government Economic Policies... Real Wage Expansion, Income Tax Indexation Under Review

Ministry of Economy and Finance Begins Work on "Issue Papers"
Prepares Economic Policies Ahead of New Administration Launch
Plans Measures to Increase Workers' Real Income
Considers Income Tax Indexation System

The Ministry of Economy and Finance has begun preliminary preparations for economic policy in anticipation of the launch of a new government. Since the new administration will take office immediately without a presidential transition committee, the ministry intends to analyze pending issues and discuss policies in advance. Among the various policy ideas gathered, the employment sector includes measures to increase workers' real income, the introduction of an income tax indexation system, and the application of the Labor Standards Act to workplaces with fewer than five employees.

According to a comprehensive report by Asia Economy on May 14, the Ministry of Economy and Finance recently instructed its departments and divisions related to economic policy to prepare "issue papers." An issue paper is a document that summarizes economic analysis and future policy initiatives. The ministry typically prepares these for the Economic Policy Directions (EPD), which are announced twice a year. Policies included in the issue papers are discussed with other government ministries and serve as the basis for finalizing the EPD.

This issue paper includes content focused on expanding workers' real income. The ministry plans to introduce incentives to increase workers' income, as it believes that a decline in real wages negatively impacts domestic demand. Real wages have been falling as the rate of price increases has outpaced wage growth. The average monthly real wage decreased for two consecutive years, from 3,599,000 won in 2021 to 3,592,000 won in 2022 and 3,554,000 won in 2023.

The ministry is also considering the introduction of an income tax indexation system. Indexation automatically adjusts tax bases, rates, and deduction systems according to the inflation rate. Among the 38 member countries of the Organisation for Economic Co-operation and Development (OECD), 22 have adopted such a system. In Korea, nominal wages rise annually due to inflation, but the tax base remains unchanged, resulting in a heavier tax burden for workers. The most likely plan is to apply an inflation index only to the tax base, without altering tax rates or deduction systems, to reduce the tax burden.

The ministry is also discussing the application of the Labor Standards Act to workplaces with fewer than five employees. Under current law, the Labor Standards Act does not apply to businesses with five or fewer employees. As a result, workers at these workplaces are not eligible for the 52-hour workweek benefit, overtime, night, or holiday pay, or paid holidays. There are also no restrictions on dismissal, and workers cannot file for relief from unfair dismissal. As of 2023, there were 7,655,862 employees (30.3%) working at such workplaces. The ministry aims to address this blind spot in labor standards coverage.

The ministry's issue papers will be used in the Economic Policy Directions announced when the new government takes office. The 21st president, who will be elected following the presidential election on June 3 next month, must begin work immediately without a transition committee. With urgent economic issues accumulating, the ministry believes that advance preparation is essential to implement economic policies swiftly. A ministry official explained, "Relevant departments and divisions are currently devising economic policies for the new government," adding, "We plan to discuss what to include in the EPD and how to implement it based on the content of the issue papers."

However, there are concerns within the ministry about preparing new government policies during the presidential election period, when political neutrality must be maintained. In response, another ministry official stated, "We do not devise policies tailored to any particular candidate or prepare multiple scenarios based on political outcomes."