[Weekly Review] Hong Warns Against Leaving, Moon... Government Bureaucracy in Uproar

October Inflation Rate Back to 0% Range
Exports Also Down 3.6%... Impact of Operating Days

[Image source=Yonhap News]

[Asia Economy Reporter Moon Chaeseok] The public sector was thrown into turmoil when Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki tendered his resignation on the 3rd, but the controversy over his position subsided after President Moon Jae-in reaffirmed his trust in Hong. Inflation dropped to the 0% range, while jeonse prices surged sharply. Exports recorded a negative growth again after a month due to the impact of working days. Tax policies were strengthened, including the government's plan to impose a retained earnings tax on personal quasi-corporations starting in 2022.

Hong's Resignation Announcement... Public Sector 'Upset'

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On the 3rd, Deputy Prime Minister Hong stated, "I will take responsibility for maintaining the major shareholder criteria for capital gains tax on stock transfers," and announced his resignation. President Moon rejected the resignation letter and reaffirmed his trust in Hong.

The apparent reason was the conflict between the ruling party and the government over the major shareholder requirements, which serve as the basis for imposing capital gains tax on stock transfers, but some analyses suggested that accumulated dissatisfaction had exploded.

Hong was criticized both inside and outside for ceding leadership to the ruling party in major national economic policies. Notable examples include handing over the national treasury for emergency disaster relief payments to all citizens due to the COVID-19 pandemic and the formulation of the 4th supplementary budget. He also failed to uphold his convictions on tax issues such as property tax reductions and the major shareholder capital gains tax criteria.

The Blue House supported Hong based on the 3rd quarter GDP growth rate of 1.95% (preliminary figure) and positive evaluations of Korea by international credit rating agencies. However, the prevailing reaction remains uncertain whether this will lead to proactive administration and conviction in economic agendas.

Inflation and Exports 'Negative'

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According to Statistics Korea on the 3rd, last month's consumer price inflation rate was 0.9%, down 0.1 percentage points from 1.0% in September. Notably, the core inflation rate fell by 0.3%, marking the lowest level in about 21 years.

What stands out is the decline in the food and energy excluded index (core inflation). The 'agricultural products and petroleum excluded index' (core inflation), created to identify long-term trends by excluding seasonal factors and temporary shocks, rose 0.1% compared to a year ago. However, the OECD-standard core inflation index, the 'food and energy excluded index,' fell by 0.3%, recording the largest drop since September 1999 (-0.4%).

On the other hand, jeonse prices surged sharply, showing the highest increase rate in 20 months due to the recent jeonse crisis. The jeonse price increase rate was 0.6%, higher than 0.5% in September. This is the largest increase rate in 20 months since February last year (0.6%). Monthly rent also rose by 0.3% in October following September. This is the largest increase since November 2016 (0.4%).

Exports also failed to avoid negative growth. According to the Ministry of Trade, Industry and Energy on the 1st, last month's exports amounted to $44.98 billion, down 3.6% from the same month last year. Unlike last year, this year the Chuseok holiday fell in October, reducing working days by two, which affected the figures. However, the average daily exports, adjusted for working days, were $2.14 billion, up 5.6% compared to the same month last year. This is the first increase in average daily exports since January (growth rate 4.2%).

Tax Policies 'Tightened'

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Tax policy thresholds have been raised. The Ministry of Economy and Finance announced on the 4th that starting in 2022, taxes will be imposed on the retained earnings of personal quasi-corporations where the major shareholder and their special related parties hold 80% or more of the shares.

The target includes personal quasi-corporations where non-business income such as interest and dividend income, and gains from disposal of real estate, stocks, and bonds exceed 50% for two consecutive years. However, amounts spent or reserved within two years for employment, investment, and research and development (R&D) are excluded from taxable retained earnings.

The 2021 budget includes corporations where the major shareholder and their special related parties hold 80% or more of the shares. It is considered that the economic substance of the corporation is effectively the same as that of the shareholder, who controls decision-making.

This means that if such personal quasi-corporations accumulate retained earnings exceeding 50% of net income or 10% of equity capital, it will be regarded as dividends and subject to income tax.

This content was produced with the assistance of AI translation services.