[2021 Economic Policy] Launch of 110 Trillion Won Investment Project... Targeting 3.2% Growth Rate Next Year

Government Announces '2021 Economic Policy Directions'
Public Investment of 65 Trillion Won in Public Housing, SOC, Korean New Deal, etc.
Promoting 'Fast and Strong Economic Recovery' through Boosting Private Consumption

[Image source=Yonhap News]

[Sejong=Asia Economy Reporter Kim Hyunjung] The government plans to activate a public-private investment project worth 110 trillion won next year, using a record-high public institution investment of 65 trillion won as a catalyst. While boosting private consumption through additional income deductions on credit cards, a 30% reduction in individual consumption tax on passenger cars, and refunds on high-efficiency home appliance purchases, the government will also promote corporate investment activation by allowing accelerated depreciation of facility investments up to 75%. Through these measures, the government expects the economy to grow by 3.2% next year, marking the largest year-on-year rebound in over a decade.

On the 17th, the government announced the '2021 Economic Policy Direction' at the Government Complex Seoul in Gwanghwamun, Seoul, stating that it aims to raise the real gross domestic product (GDP) growth rate to 3.2% next year through a 110 trillion won public-private-corporate investment project. This represents a 4.3 percentage point (p) improvement compared to the government's forecasted annual economic growth rate of -1.1% for this year. If realized, it would be the largest rebound in over 10 years since overcoming the global financial crisis in 2009-2010 (0.8% → 6.8%, a 6.0 percentage point increase).

The growth rate of 3.2% proposed by the government for next year is the highest among forecasts released by domestic institutions. Previously, the Bank of Korea and the Korea Development Institute (KDI) predicted growth rates of 3.0% and 3.1%, respectively, while major international organizations such as the Asian Development Bank (ADB) and the Organisation for Economic Co-operation and Development (OECD) forecasted 3.3% and 2.8%, respectively.

◆Public Institutions Lead, Corporate Investment Pushes... "3.2% Growth Next Year"= The broad framework of next year's economic policy goals is 'rapid and strong economic recovery and revitalization,' and 'a major transition to a leading economy.' The government expects both domestic demand and exports to increase, driving a rebound in growth next year. While domestic consumption is expected to improve moderately, investment is anticipated to expand, centered on IT and civil engineering construction.

First, the driving force behind the '110 trillion investment project' is public institution investment (65 trillion won). This is a record high, increasing by 3.5 trillion won compared to this year's plan (61.5 trillion won). The project will focus on expanding social overhead capital (SOC) infrastructure such as public housing, railroads, highways, and ports, as well as power plant construction and facility reinforcement, centered on Korean New Deal investments. Private investment projects will amount to 17.3 trillion won, actively exploring new types of projects such as Green Smart Schools under the Korean New Deal.

The scale of corporate investment projects is about 28 trillion won. The government plans to discover 18 trillion won worth of large-scale new investment projects through active support for resolving investment difficulties, including institutional improvements and stakeholder coordination, and to support the commencement of projects worth more than 10 trillion won within 2021 among already identified corporate investment projects. Representative examples include Hwaseong Complex Theme Park (4.6 trillion won), Goyang Content Park (1.8 trillion won), and Yongin Semiconductor Cluster (1.6 trillion won).

◆Expecting 3.1% Private Consumption Growth through 'Consumption Rebound'= The government forecasts private consumption growth of 3.1% next year, up from an estimated -4.4% this year. Essentially, private consumption will play a key role in next year's growth. To achieve this so-called 'consumption rebound,' the government will introduce an additional income deduction for credit card and other usage amounts that increase by a certain level (undecided) compared to the previous year. Additionally, consumption stimulus measures proven effective, such as a 30% reduction in automobile individual consumption tax (until June 2021) and refunds on high-efficiency home appliance purchases (50 billion won, from March to December), will be implemented.

Although income policy support is expected to increase consumption, the base effect from this year's emergency disaster relief funds is expected to limit the growth rate. On the other hand, factors such as ▲rising stock prices ▲increased savings due to deferred consumption ▲declining loan interest rates support improved consumption capacity, while positive factors such as government consumption support incentives and improved consumer sentiment are also present.

Facility investment is expected to increase by 4.8% annually, supported by steady investment growth in the semiconductor and IT sectors and policy effects such as investment incentives. However, this is 1.0 percentage point lower than this year's forecast of 5.8%, as the base effect is expected to reduce the growth rate compared to this year. Exports are expected to show a significant increase (8.6%) as the global economy and trade recover, led by semiconductors and new industry sectors, overcoming previous sluggishness.

Additionally, current account GDP is expected to grow by 4.4% annually, supported by an improvement in real growth rate (3.2%) and an increase in the GDP deflator (1.2%). The GDP deflator is forecasted to rise by 1.2% due to improved terms of trade from the global semiconductor price recovery and domestic demand recovery.

◆Employment Improves as Economy Loosens... "150,000 More Employed"= The government also expects an increase of about 150,000 employed persons domestically next year, influenced by improvements in domestic demand and manufacturing sectors, as well as expanded support for employment maintenance and job creation. The employment rate is forecasted to slightly rise to 65.9% from 65.8% this year, while the unemployment rate is expected to slightly decrease to 4.0% from 4.1% this year. Compared to the pace of growth rate improvement, employment is expected to lag behind the economic rebound.

Considering that opportunities for youth labor market entry have been significantly lost due to reduced new hiring amid the COVID-19 spread, the government emphasized the need to strengthen 'customized job support' for vulnerable groups such as youth at risk of falling into hysteresis.

Furthermore, consumer prices are expected to rise by 1.1% as the inflation rate expands. While there are mixed upward and downward factors in sectors such as oil and agricultural product prices, inflationary pressure from domestic demand recovery and downward pressure from strengthened welfare policies are expected to act simultaneously.

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