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President’s priorities shift to growth in 2020

Moon’s policy-palooza continues, but with a new focus this year
Jan 06,2020
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The first exported products of 2020 load on an Asiana Airlines aircraft at Incheon Airport on Jan. 1. [YONHAP]
Now in its fourth year, the Moon Jae-in government is still battling a weak economy. Despite several positive indicators, including more jobs and improvements in industrial output, consumption and investment in the final quarter of 2019, the overall situation remains critical and the outlook dim.

The administration championed income-led growth at the beginning of its term in office, but it has increasingly started to focus more on policies that will boost growth.

Korea’s economy is forecast to have grown 2 percent in 2019, though it may not have even reached that key level. Exports, one of the key pillars of the economy, fell 10.3 percent in 2019, the first double-digit decline in a decade.

It has been falling for 13 consecutive months since December 2018.

In the final three months of last year, industrial output, consumption and investment improved, but in most months of 2019, the economy struggled, especially in terms of investment as companies turned cautious and cut back.

This year, the government is continuing its efforts to boost growth, with increased tax breaks for productivity upgrades and research and development (R&D) by start-ups and small- and medium-sized enterprises (SMEs).

The government is especially focused on the development of materials, parts and equipment in order to reduce dependency on foreign imports in the wake of Japan’s tighter export controls on three materials key to the making of semiconductors and displays.

The first place visited by Minister of Trade, Industry and Energy Sung Yun-mo in the new year was Soulbrain, a semiconductor and display material company based in Gyeonggi. There, Sung reiterated the government’s commitment to industry for reducing import dependency.

“The government, through the 2.1 trillion won budget which is 2.5 times larger than the previous year, will strengthen the development and mass production of the top 100 core strategic products in order to establish an industrial ecosystem that strongly supports material, parts and equipment companies,” Sung said. “[The government] has been actively working to counter Japan’s export restriction since they were imposed in July last year in joining forces with the private sector. Soulbrain’s expansion of production capabilities in terms of high-purity hydrogen fluoride is a leading example.

“We are in the process of taking the Japanese export restriction as an opportunity to strengthening the competitiveness of Korean material, parts and equipment.”

The government this year is expanding its tax benefits on investments.

While the Moon administration is continuing to push for income-led growth, now referred to more as inclusive economy, it is less ambitious compared to its first two years.

This is evident in the lower increase in minimum wage compared to the last two years and the decision to grant a grace period in cracking down on violations of the shorter workweek by businesses with between 50 and 299 employees. The shorter workweek applies to such smaller businesses this year.

Support for the elderly will continue this year.

Here are some of the key policy changes in 2020.



Supporting business growth

The Moon administration has set a 2.4 percent growth target.

“When setting economic goals last month, I said we will achieve an economic rebound at any cost, while establishing the foundation for raising our economic growth potential,” Finance Minister Hong Nam-ki said in his New Year’s speech. “We will focus on raising the dynamism of our economy and inclusiveness through the 100 trillion won ($85.7 billion) investment project, beginning the era of 20 million foreign tourists, the second venture boom, enhancement of the social safety net and fostering of D.N.A. [digital, network, AI] in preparation for the future.”

One of the areas on which the government is focusing is raising productivity through the incorporation of the latest technologies.

Starting this year, the government is expanding the tax credit offered to companies that invest in upgrading productivity. The period in which this tax credit is offered has been lengthened as well.

Currently, for companies that improve productivity by installing high-tech systems - including automation or leading technologies, such as semiconductor and new materials - the government offers a corporate income tax credit of 1 percent for conglomerates, 3 percent for companies in between of conglomerates and SMEs and 7 percent for SMEs.

Staring this year, this credit will be raised to 10 percent for SMEs and 5 percent for companies between SMEs and large enterprises. The tax credit for conglomerates will be raised to 2 percent, but it will be rolled back to 1 percent in 2021.

Driving innovative growth has been a priority for the government.

It is expanding its tax credit on commissioned or joint R&D spending in the service industry. Previously, the credit was available only for internal R&D spending. Service industries covered are content creators and engineering-related services, such as architecture and aerospace design.

Tax reductions for starting small businesses that were previously granted to businesses in 148 categories are now available to business in 245 categories. The reductions range from 50 percent to 100 percent depending on the founder and the location of the business.

A 100-percent tax cut is only given to businesses founded by individuals 34 years old or younger and whose business is located outside of greater Seoul and other large cities. Businesses in wholesales, retail, finance, including insurance, as well as education, real estate and property and housing rental are not eligible for the tax reductions.

One of the biggest changes this year is the government’s support of the makers of material, parts and equipment in order to reduce the dependency on imports from Japan, after that country made exports to Korea more difficult after a Korean Supreme Court’s 2018 ruling on forced labor during the occupation of Korea.

A new tax credit for joint investments for the development of materials, parts and equipment was established for non-conglomerate developers. It is a 5 percent credit on the stake acquired in the makers of the essential products.

For the first time, the government is offering tax credits for companies that acquire foreign material, parts and equipment makers. A 7 percent tax credit is offered to companies that are in between conglomerates and SMEs and a 10 percent for SMEs.

In an effort to encourage the hiring of talented foreign technicians in the material, parts and equipment industries, the government has expanded its cuts of income taxes. Previously, these foreign technicians received a 50 percent income tax cut for five years. Starting this year, they get a 70 percent tax reduction for three years and a 50 percent cut for two additional years.

Starting March this year, knowledge service industries, such as software development and content businesses that previously operated overseas and relocated to Korea, will be eligible to apply for the government’s special benefits on returning companies that was previously limited to manufacturers.

The benefit includes income and corporate tax cuts and 50 percent discounts on government properties.



Downsized income-led growth

The Moon administration in 2020 is continuing with its income-led growth but expanding the concept to become the inclusive economy.

However, the weakening economy has taken a toll, forcing the government to focus more on reviving the economy through the downsizing of the income-led growth policies.

The biggest change is the deceleration of the minimum wage increases.

The minimum wage was increased 16.4 percent in 2018 and 10.9 percent in 2019. This year, it was only raised 2.9 percent to 8,590 won per hour. However, the rate is no longer applied only to regular employees, but to all workers covered under the labor law regardless of nationality.

The minimum wage now applies to contract workers, one-day hires and foreign workers.

The government has reduced its financial support of small businesses hiring employees. Last year, 2.82 trillion won was budgeted for the job stability fund. The government added 98.5 billion won in November after the fund dried up as the businesses applying for the government subsidy grew beyond the initial estimate.

This year, the budget will total 2.16 trillion won, a roughly 25 percent cut.

The fund was created in 2018 in order to support small businesses struggling with the minimum wage increase.

This year, a business with fewer than 30 employees will receive 90,000 won every month for each employee receiving a monthly wage below 2.15 million won. The monthly subsidy has been cut 30 percent from 130,000 won.

Smaller businesses with fewer than five employees will receive a subsidy of 110,000 won, down from 150,000 won in 2019.

The government has broadened access for such funding.

Apartment complexes hiring security guards and janitors are now qualified. Social companies - facilities that conduct job training or supporting activities for people with disabilities - that have more than 30 employees will also be eligible for the job funds, as are companies with fewer than 300 employees but located in areas that are designated by the government as being in industrial crisis or job crisis.

Another key income-led growth policy, the shorter workweek, has also been scaled back.

While the new rules will be applied to businesses with between 50 and 299 employees this year, businesses will be given a grace period of a year for meeting the requirement.

The shorter workweek, which was adopted in July of 2018 for businesses with more than 300 employees, were given four months to change their practices if found in violation. If they failed to comply, the owner of the business could face imprisonment of up to two years or a fine of up to 20 million won.

Other income-led growth policy changes include increasing the minimum earned income tax credit (EITC) from 30,000 won to 100,000 won a month.

This means a person living alone with an annual income of less than 4 million won, single-earning households with an annual income below 7 million won and double-income families earning less than 8 million won will receive at least minimum 100,000 won a month.

The government estimates some 100,000 low-income households, among the 3.3 million that receive the tax credit, will benefit from the tripled minimum EITC.

Income tax cuts of up to 70 percent are granted for women who get rehired at an SME after suspending their career due to pregnancy and the raising of children. The tax cut is only given to the women who have at least 1 year of income.

Another condition is that the woman must be rehired in the same industry.



Encouraging spending

The government this year hopes to achieve its 2.4 percent growth by encouraging consumers to spend.

It is cutting the consumption tax by 70 percent on car purchases for those who have owned their car for more than 10 years. The tax cut not only targets spending but also the environment. As such, the tax cut will not be applied to those switching to new diesel-fueled vehicles.

It is only offered in the first six months of the year.

The government is expanding duty free on arrival at airports throughout the country.

The first on-arrival duty free shop was approved in May at Incheon International Airport, though sales have fallen short of the government expectations. Starting in March, the on-arrival duty free shops will be allowed to sell one carton of cigarettes per customer. Previously, such sales were banned.

The government will also cut taxes on the use of golf courses in areas that are designated as being in an employment crisis, such as Gunsan, North Jeolla, and Geoje, South Gyeongsang.

In the second half of the year, credit-card users will be able to transfer all of their accumulated reward points to a bank account of their choosing.



Continuing support of the elderly

The Moon government has been increasing its support of senior citizens, especially when it comes to jobs. And these efforts will continue this year.

The government has decided to expand the jobs for the elderly from last year’s 640,000 to 740,000. Additionally, public service jobs for senior citizens, such as taking care of other senior citizens and helping low-income households, are being extended from nine months to 12 months.

The conditions for applying for such jobs have even eased. Previously, only those who are 65 years old and above and receiving the government basic living subsidy were permitted to apply for the jobs. But starting this year, anyone above 65 can apply.

The government is also providing 900,000 won every quarter for two years when a company continues to hire workers who have reached retirement age.

In the first quarter, the age at which senior citizens can apply for the housing pension will be lowered from 60 years old to 55.

In the case of a 55-year-old who lives in an apartment valued at 300 million won, they will be eligible to receive a 460,000 won monthly pension for the rest of his or her life.

If the couple that was receiving the pension dies before the entire amount, including interest, is utilized, the remainder will be inherited by the children.

The government has raised the basic living expense subsidies provided to lower-income senior citizens.

Last year, only those in the bottom 20 percent income bracket were allowed to receive the subsidy, but starting this year, that threshold has been raised to the bottom 40 percent bracket.

As such, the number of recipients is expected to more than double from 1.56 million to 3.25 million this year.

The monthly subsidy has been raised from 250,000 won to 300,000 won.



Other changes

In terms of welfare, every household with a child that is under 7 years old will receive a monthly subsidy of 100,000 won. The number of children that are expected to benefit from the payment is expected to increase from last year’s 2.47 million to 2.63 million.

The free tuition for high school seniors that was applied in the second half of last year will be expanded to juniors this year.

This is expected to save roughly 1.58 million won that the parents would have had to have spend in a year, including admission fees and textbook expenses.

In the first half of the year, health insurance will be accepted on ultrasound exams for women, while the health insurance will be expanded to breast and heart exams in the second half.

The government is also tightening its rules on the environment as pollution has become a national concern.

Starting in April, the Environment Ministry will expand its air pollution management from the greater Seoul area to the entire country. This means every local government will be under the scrutiny for pollution.

Major companies that were allowed to disclose the results of the pollution data collected through the telemonitoring system (TMS) must now provide the information real-time.

For government institutions with more than 10 vehicles, new cars must be low-carbon emission vehicles. Those that violate rule will face a 3 million won fine.

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]