[Weekly Review] Despite Economic Recovery, Concerns Over 'K-Polarization'... Bank of Korea Indicates Interest Rate Hike in Second Half

Last Year 'Tax Jobs' Employment Retention Rate Plummeted 13%P
Urgent Need to Reform Elderly Job-Centered Structure
G7 Agrees on 15% Minimum Corporate Tax Rate...Government Cautious
Tax Revenue Up by 32.7 Trillion Won, Possibility of 30 Trillion Won 2nd Supplementary Budget↑
Ruling Party Interested in Tax Reform Imposing Comprehensive Real Estate Tax on Top 2% Homeowners

On the 11th, when the government announced the extension of the current social distancing and ban on private gatherings of five or more people for three weeks, the streets of Myeongdong, Seoul, were deserted. Kwon Deok-cheol, the first head of the Central Disaster and Safety Countermeasures Headquarters, explained the reason for extending the social distancing measures at a Central Disaster and Safety Countermeasures Headquarters meeting held at the Government Seoul Office, saying, "The average number of confirmed cases over the past six weeks has been in the high 500s, and the infection reproduction number has remained around 1 for the past four weeks, so the scale of the outbreak is not decreasing." /Photo by Moon Ho-nam munonam@

[Sejong=Asia Economy Reporter Moon Chaeseok] Amid the upward revision of South Korea's provisional Gross Domestic Product (GDP) growth rate, Lee Ju-yeol, Governor of the Bank of Korea, hinted at the possibility of an interest rate hike in the second half of the year. Concerns have emerged that the K-polarization phenomenon, where performance gaps widen by industry due to slower growth in the service sector compared to manufacturing, may expand. It was also pointed out that there is still a long way to go for structural improvement in the labor market as employment growth continues mainly among the elderly. Attention was also drawn to the G7 agreement on a minimum corporate tax rate of 15% and the ruling Democratic Party's discussions on real estate tax reform, which includes imposing comprehensive real estate tax on the top 2% of houses by official assessed value.

Manufacturing grew 3.8% in Q1 while services grew 0.7%

On the 9th, the Bank of Korea announced the 'Provisional National Income for Q1 2021,' reporting a provisional GDP growth rate of 1.7% for the first quarter. This is 0.1 percentage points higher than the flash estimate of 1.6%, lending weight to forecasts that this year's economic growth rate will exceed 4%.

However, concerns remain that despite the higher growth rate, vulnerable groups such as low-income and small-scale self-employed individuals will continue to suffer due to uneven recovery speeds across sectors and rising prices. Manufacturing grew 3.8% thanks to strong performance in transportation equipment, computers, electronics, optical devices, and chemical products, but the service sector increased by only 0.7%, centered on wholesale and retail, accommodation and food services, and finance and insurance. Although it escaped negative growth since -0.8% in Q2 last year, the growth rate remains in the single digits. Notably, accommodation and food services decreased by 5.4% compared to the previous quarter.

Lee Ju-yeol hints at interest rate hike in the second half

Lee Ju-yeol, Governor of the Bank of Korea. (Photo by Yonhap News)

With signs of recovery in the Korean economy and rapid global economic rebound, an interest rate hike within the year is becoming a foregone conclusion, and Bank of Korea Governor Lee Ju-yeol also hinted at a rate increase. In his speech commemorating the 71st anniversary of the Bank of Korea on the 11th, Governor Lee cited "orderly normalization of monetary policy" as a key task to be pursued after the second half of the year. This is interpreted as a more hawkish stance compared to his statement after the Monetary Policy Committee meeting last month, where he said, "We will maintain an accommodative stance for the time being."

Many analysts believe Governor Lee's hawkish tone stems from concerns over the side effects of ultra-low interest rate policies, such as rapid inflation and soaring debt due to expansionary fiscal policies. He stated, "Bold economic stimulus measures unprecedentedly implemented by governments and central banks worldwide have greatly helped overcome the crisis, but it is also true that imbalances between sectors and social classes have widened during this process," adding, "Private debt has expanded significantly, and recently concerns about global inflation have increased."

Last year's fiscal job retention rate falls to the 30% range

As the government flooded the market with short-term jobs under the pretext of overcoming the COVID-19 crisis, the job retention rate for fiscal support job projects sharply declined last year. This rate measures how many jobs created with public funds continue as private employment after support ends, indicating that once support ceased, these jobs no longer functioned as employment. Critics argue this reflects the government's focus solely on creating jobs regardless of market demand.

According to the 'Efficiency Plan for Fiscal Support Job Projects' reported by the Ministry of Employment and Labor to the Cabinet meeting on the 8th, the job retention rate for government direct job projects last year was 37.8%, down 13.5 percentage points from the previous year. This means that out of 10 people, fewer than 4 retained their jobs last year compared to 5 in 2019. This is the lowest figure since the government began evaluating fiscal support job projects, including direct jobs, annually in 2018.

The decline in job retention rate is attributed to the government's focus on job creation through fiscal spending last year, while the private sector's capacity to create jobs weakened. A Ministry of Employment and Labor official said, "The job retention rate is an indicator of how many workers properly enter the labor market after government support ends," adding, "This ultimately means that the structural improvement of South Korea's labor market is slowing down."

Structural improvement in employment still distant... Three out of four new jobs in May were 'elderly jobs'

Last month, the employment pattern continued with an increase in elderly workers rather than the youth, who are often cited as the engine of economic growth. This is why the government is focusing on increasing quality jobs (high-income IT sector) for the working-age population and boosting the number of regular workers (employees with stable salaries).

According to the 'May Employment Trends' released by Statistics Korea on the 9th, the total number of employed persons last month was 27.55 million, an increase of 619,000 compared to the same month last year. However, about 74% (455,000) of the increase in employment last month was among those aged 60 and over. Employment among people in their 30s decreased by 69,000, and those in their 40s also declined by 6,000.

The government announced a talent development plan to significantly increase software and new drug experts by 2025. On the 9th, Hong Nam-ki, Deputy Prime Minister and Minister of Economy and Finance, stated that over the next five years, the government plans to nurture 413,000 software talents, 89,000 more than initially planned. According to the Software Policy Research Institute, the demand for new software personnel over five years is 353,000, but only 324,000 are expected to be produced through universities and government projects, resulting in a shortage of 29,000 compared to industry demand. Therefore, the government decided to train 89,000 more than the shortage, more than triple the deficit.

On the 10th, Deputy Prime Minister Hong also announced plans to train 10,000 experts by 2025 to propel South Korea into one of the world's top five countries in clinical trials and new drug development by 2030. The nurturing of new drug talent is interpreted as an alternative to increasing high value-added bio jobs, alongside the IT sector.

G7 agrees on minimum corporate tax rate of 15%

Janet Yellen, U.S. Secretary of the Treasury. (Photo by Reuters Yonhap News)

The Group of Seven (G7) countries, including the United States, Japan, and Germany, agreed on measures to limit tax breaks for multinational corporations by setting a global minimum corporate tax rate of 15%. This puts an end to decades of fierce competition to attract foreign companies through corporate tax cuts.

After a meeting in London on the 5th (local time), G7 finance ministers issued a joint statement supporting countries maintaining corporate tax rates at or above 15% and requiring multinational corporations to pay at least 20% tax on excess profits (profits exceeding 10%) in the countries where they operate.

Since South Korea's corporate tax rate exceeds 15%, it is expected not to suffer significant damage. However, as it remains unclear how Korean companies will be affected in overseas operations, experts emphasize the need for prompt government response. Professor Ahn Chang-nam of Gangnam University’s Department of Taxation said, "The government should reflect the unique characteristics of domestic companies and try to exclude as many as possible from the top 100 companies' criteria."

Tax revenue up by 32.7 trillion won, supplementary budget likely to increase

According to the Ministry of Economy and Finance's 'Monthly Fiscal Trends and Issues June Edition' (as of the end of April) released on the 8th, national tax revenue up to April was 133.4 trillion won, an increase of 32.7 trillion won compared to last year. The progress rate, which indicates the proportion of actual tax collected against the annual target, rose by 11.9 percentage points from a year ago to 47.2%.

Given this situation, political voices calling for a supplementary budget of around 30 trillion won are growing louder, far exceeding the government's proposed 20 trillion won.

The Democratic Party and the government announced that they will not retroactively compensate small business owners and self-employed individuals who suffered losses due to government business suspension measures to curb COVID-19 over the past year. Instead, they plan to provide damage support payments ranging from 1 million to 5 million won to high-risk sectors such as karaoke rooms, PC cafes, entertainment bars, travel agencies, and wedding halls facing business crises.

Ruling party's 'top 2% comprehensive real estate tax' application draws attention

Song Young-gil, leader of the Democratic Party of Korea (center), attending the Supreme Council meeting held at the National Assembly on the 9th, delivering an opening remark. Photo by Yoon Dong-joo doso7@

Public attention is focused on the ruling party's real estate tax reform plan, which holds a majority in the National Assembly. The key issue is whether the party leadership, including leader Song Young-gil, will succeed in imposing comprehensive real estate tax on the top 2% of one-household-one-homeowners.

The debate centers on the extent of tax deductions for houses estimated to be in the top 2% by official assessed value, around 1.1 billion won. The ruling party is reportedly weighing whether to grant a deduction of about 1.1 billion won, corresponding to the top 2% threshold, or to maintain the current 900 million won deduction for houses above 1.1 billion won.

However, with several ruling party lawmakers and aides testing positive for COVID-19 and the National Assembly being fully closed, the ruling party's caucus meeting was postponed, making delays in the Democratic Party's real estate tax reform inevitable.

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