[Q&A] Vice Minister of Economy and Finance: "Raising Social Distancing to Level 3 Will Act as a Downside Risk to the Economy in 1Q Next Year"

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[Asia Economy Reporter Jang Sehee] Kim Yong-beom, the 1st Vice Minister of Strategy and Finance, said, "Adjusting social distancing to level 3 could act as an additional downside risk to the economy around the end of this year or the first quarter of next year."

At a pre-briefing held at the Government Complex Sejong on the 14th, Vice Minister Kim explained the government's economic policy direction for 2021, stating, "The GDP growth forecast for next year (3.2%) reflects the social distancing situation up to level 2.5, and does not yet incorporate any further upward revisions."

He added, "If the spread of COVID-19 prolongs, the downside risk to the economy is expected to deepen. However, it is also necessary to consider that the situation will eventually calm down and the strength of a technical rebound will increase."

The following is a Q&A session with Vice Minister Kim, Deputy Vice Minister Bang Gi-seon, Director General of Economic Policy Lee Hyung-il, and Tax Policy Director Kim Tae-ju.

▲Does the growth forecast for next year reflect the possibility of raising social distancing to level 3?

=This forecast comprehensively considers the impact of social distancing level 2.5 due to the recent COVID-19 spread, as well as domestic and international situations such as vaccine and treatment development and distribution. Strengthening or adjusting distancing measures will act as an additional downside risk factor to the economy around the end of this year or the first quarter of next year. While it is preferable that the level does not rise to 3, if such a situation occurs, further economic forecast adjustments will be necessary. If the COVID-19 spread prolongs, the economic downturn will deepen, but the situation will eventually stabilize. It is also important to consider that the strength of a technical rebound will increase thereafter.

▲What is the basis for judging recovery in the shape of a Nike swoosh rather than a V-shaped rebound?

=We forecast Korea's growth rate next year at 3.2%, which means the economy will rise to about 101 compared to 100 in 2019, making it one of the few countries to achieve this. Our goal is to quickly compensate for sectors damaged by various shocks and enable a return to economic activity. While terms like V-shaped or Nike swoosh-shaped recovery are used, the key is how quickly the recovery occurs. However, Korea is unlikely to show a prolonged sideways tail shape. The K-shaped recovery seen in asset markets may involve excessive flows, so rather than responding uniformly, differentiation according to characteristics is necessary.

▲What is the expected policy effect of the current consumption measures?

=It is difficult to quantify precisely as it depends on the system design. The 4+4 coupon program involves a budget of 50 billion KRW and is expected to support about 2 trillion KRW in consumption. The high-efficiency home appliance rebate can also be back-calculated to a similar figure.

▲How will the criteria for stabilizing quarantine measures be determined?

-There are no set criteria for each quarantine stage. When stopping or resuming consumption coupons, we closely consulted with the Central Disease Control Headquarters (CDCH). If the CDCH agrees that face-to-face activities can be minimized, we will resume the program.

▲Many policies assume quarantine stabilization; is there a Plan B?

=Next year, various policies on consumption, investment, and exports have been proposed, and the top priority is to implement them quickly. Stabilizing COVID-19 is urgent. Also, administrative procedures must be completed as soon as possible to execute the budget early. We will respond flexibly depending on the situation thereafter.

▲Please provide an example of income deduction for the increase in credit card usage compared to the previous year.

=Income deduction is basically applied to amounts exceeding 25% of total salary. The deduction rates differ by spending category: 15% for credit cards, 30% for cash receipts, 30% for books and performances, and 40% for traditional markets. Ultimately, deductions apply to amounts exceeding 25% of the salary, with limits. Since final consumption statistics for this year are not yet available, it has not been decided whether to set the threshold at 5%. If the threshold is set at 5%, for example, if spending increased from 20 million KRW to 25 million KRW (an increase of 5 million KRW), this is considered an increase over 5%. If an additional 10% deduction is applied to the 4 million KRW exceeding 5% (1 million KRW), an additional deduction of about 400,000 KRW is possible. Applying a 15% income tax rate to this case reduces the annual tax burden by about 60,000 KRW.

▲What are the achievements and future plans of the Han-georeum model?

=The Han-georeum model showed results this year in urban-type accommodations. Hadong Alps, which had social disagreements and had not progressed, was included in the menu. Provisionally preparing alternatives is considered an achievement.

▲How much compensation will be paid for the 3rd phase new towns next year?

=The total compensation scale for the 3rd phase new towns needs to be calculated precisely, but it is expected to be about half of the total compensation amount. Most land compensation is preferred in cash, but if the land is received and then sent to a REIT, the REIT can build houses. Looking at the capital gains tax reduction rates, cash compensation gets 10%, land 30%. If a 30% reduction is also applied when cash compensation is invested in a REIT, it would broaden the opportunity to choose land.

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