[2023 Economic Outlook] Yoonomics' 'Trap of Minority Government' Remains... Intensified Extreme Confrontation Before General Election

Yoon Administration's 6-Month Bill Passage Rate '0%'... Lowest Ever
Red Flags for Corporate Tax Cuts, Financial Investment Income Tax Deferral
Opposition: "Supplementary Budget Expected Due to Economic Freeze... No Tax Cuts"
vs Ruling Party: "Must First Relieve Corporate Struggles"
Political Conflict Over National Tasks... Economic Uncertainty Increases

[Asia Economy Reporters Chae-eun Koo, Ki-min Lee] ‘89 cases vs. 0 cases’ (as of December 14)

In the six months since the inauguration of the Yoon Seok-yeol administration, none of the 89 bills proposed by the government to the National Assembly have been passed. This is the first time since the direct presidential election system was established in 1987 that such a zero-passage rate has occurred. It reflects the extreme confrontation between the ruling and opposition parties and the intense all-out conflict, indicating that political strife variables have increased uncertainty in next year’s economic policies. Businesses and households face macroeconomic risks of high inflation, high interest rates, and high exchange rates, and with policy variables left blank, they have no choice but to look ahead to next year with uncertainty. Many government tasks are expected to be stuck in long-term gridlock due to the trap of a ruling minority and opposition majority.

Next year, especially, is a period when the ruling and opposition parties compete for clarity to rally their support bases ahead of the 2024 general election. The Yoon Seok-yeol government, entering its second year, must drive economic policies summarized as ‘big market, small government’ to seek a rebound in approval ratings, which will be a barometer of the election outcome. The opposition party should use the first half’s government investigations and the second half’s parliamentary audits as powder kegs to highlight the current administration’s economic failures. As a result, major government tasks such as corporate tax rate cuts, postponement of financial investment income tax, easing of the Serious Accident Punishment Act, and labor market flexibility are highly likely to face obstacles at every turn.

Six Months into Yoon Seok-yeol Government, Government Bill Passage Rate ‘0%’…Lowest Ever

According to the National Assembly Bill Information System on the 15th, since the inauguration of the Yoon Seok-yeol government (May 10), a total of 89 government bills have been proposed (as of the 14th). Among these, zero bills have passed the National Assembly. This means the government bill passage rate during the first six months of the administration is 0%, the lowest ever. Although the passage rate of government bills within the first six months after a new president’s inauguration has never been high, it has never been zero.

In 1988, the Roh Tae-woo administration submitted four bills, two of which passed. The Kim Young-sam administration proposed 21 bills, with 18 passed; the Kim Dae-jung administration proposed 43 bills, with 8 passed. The Roh Moo-hyun administration proposed 35 bills, with 5 passed; the Lee Myung-bak administration proposed 47 bills, with 1 passed; the Park Geun-hye administration proposed 70 bills, with 9 passed; and the Moon Jae-in administration proposed 160 bills, with 12 passed.

As the confrontation between the ruling and opposition parties prolongs, ‘cooperation’ on major government tasks legislation is not being achieved. Especially this year’s regular session of the National Assembly has seen disruptions in standing committee subcommittees and ruling party boycotts due to political issues such as the motion to dismiss Minister of the Interior and Safety Lee Sang-min and the Itaewon tragedy parliamentary investigation. With the general election one year away, this extreme confrontation between the ruling and opposition parties is expected to intensify next year.

Red Light for Corporate Tax Cuts and Financial Investment Income Tax Postponement

[Image source=Yonhap News]

The disarray in advancing the Yoon Seok-yeol government’s national tasks is clearly evident in tax reduction-related legislation. The government proposed a tax reform plan to lower the corporate tax top rate from 25% to 22% and simplify the tax bracket structure. Accordingly, the current top corporate tax rate of 22%, applied to companies with taxable income between 20 billion and 300 billion KRW, would also apply to large corporations with taxable income exceeding 300 billion KRW. If this plan passes the National Assembly as is, it will mark the first corporate tax top rate cut in 13 years since the Lee Myung-bak administration in 2009.

On the other hand, the Democratic Party proposed maintaining the top rate of 25% for companies with taxable income exceeding 300 billion KRW and lowering the rate to 10% (government proposal: 20%) for companies with taxable income below 500 million KRW. This means a selective corporate tax cut for large and small companies. The ruling party has clearly opposed this differentiated corporate tax cut proposal. The Democratic Party also worries that applying the 22% corporate tax cut universally could become a ‘super-rich tax cut,’ making consensus difficult to reach.

There is also a significant difference in stance regarding the postponement of the financial investment income tax. The government announced a tax law amendment in July to postpone the introduction of the financial investment income tax for two years until 2025, arguing that the implementation should be delayed considering the stock market downturn. However, the opposition party believes the implementation should not be hastily delayed to maintain trust in the capital market, and no consensus has been reached.

Opposition: “Additional Budget Expected Due to Economic Freeze... No Tax Cuts” vs. Ruling Party: “Must First Relieve Corporate Breathing Space”

The stark difference in views on tax cut policies stems from the two parties’ very different perspectives on solutions to next year’s economic crisis. The Democratic Party believes that ‘fiscal expansion’ policies such as tax increases or government bond issuance will be necessary starting in the first half of next year. The Democratic Party’s Policy Committee forecasts a chain recession due to worsening corporate management amid the three highs (high interest rates, high inflation, high exchange rates) and instability in the corporate bond market. This could lead to a chain of crises: ‘tightening of the funding market → deterioration of real estate project financing (PF) → surge in marginal companies → full-scale restructuring → worsening employment market → massive public fund injection.’ Given this chain, economic stimulus through supplementary budgets is essential, so tax cuts should not be implemented.

Conversely, the government and ruling party argue that precisely because of this, economic stimulus through tax cuts is necessary. The People Power Party repeatedly emphasizes that domestic corporate tax rates are high compared to major countries worldwide. The effective tax burden on domestic companies is 18.8% overall and 21.9% for large corporations (2020 data), exceeding that of the U.S. (14.8%), Japan (18.7%), and the U.K. (19.8%). The corporate tax ratio to GDP is also high at 4.3%, ranking 6th among 38 OECD member countries. They argue that lowering corporate tax is essential to prevent macroeconomic risks becoming visible due to bond market tightening and to promote investment and employment.

Labor Reform Bill, Expected to Face ‘Polarized’ Confrontation Between Ruling and Opposition Parties

[Image source=Yonhap News]

The Yoon Seok-yeol government’s labor reform policies, represented by ‘labor market flexibility’ and ‘strong response to illegal strikes,’ are another flashpoint in the rapidly cooling political climate. The structure of ‘Democratic Party supporting labor vs. People Power Party representing business’ is forming, and the confrontation is expected to intensify next year.

Many of the government’s key corporate regulation relaxations and labor-related legislation face strong opposition from the opposition party. Representative examples include the safety freight rate system (amendment to the Freight Transport Business Act) and the 8-hour additional work system for workplaces with fewer than 30 employees (amendment to the Labor Standards Act), both of which are set to expire this year with less than three weeks remaining.

Regarding the safety freight rate system, the Democratic Party passed a three-year extension bill through the Environment and Labor Committee alone, while the ruling party has expressed strong opposition. The 8-hour additional work system is opposed by the opposition party. The Democratic Party’s stance is that these bills are close to ‘anti-Moon Jae-in’ legislation and that President Yoon’s campaign mention of ‘120-hour workweeks’ could become a reality, so no concessions are possible.

The Yoon Seok-yeol government’s labor structure reform bill, which allows up to 69 hours of work per week, also faces significant differences with the Democratic Party, making coordination difficult. Amendments to Articles 2 and 3 of the Trade Union Act are pending in the Environment and Labor Committee but face strong opposition from the People Power Party. The government’s proposed easing of the Serious Accident Punishment Act is stalled due to opposition from the opposition party, and the bill to increase the Korea Electric Power Corporation bond limit was also rejected in the National Assembly due to opposition.

Political Strife Over Government Tasks... Economic Uncertainty Increases

[Image source=Yonhap News]

Professor Hong Ki-yong of Incheon National University’s Department of Business Administration pointed out, “Next year, with forecasts of severe external challenges such as unprecedented global economic conditions in recent decades and bloc formation in international affairs, if bills related to corporate activity revitalization such as corporate tax cuts are not passed, corporate activities will become more difficult.” He added, “Economy and industry can lose competitiveness if delayed by even one year. The opposition party should not blindly oppose for the sake of elections or approval ratings.”

Political commentator Lee Jong-hoon predicted, “Each party is already counting down to the general election D-day and focusing all efforts on consolidating their support base, so the National Assembly’s disruption over contentious economic bills will continue next year.” Professor Shin Yul of Myongji University’s Department of Political Science said, “The safety freight rate system is a representative case where even bills with expiration dates are failing to find consensus between the ruling and opposition parties. If the opposition party proceeds with ‘legislative unilateralism’ by passing all bills alone without deliberation, political strife could worsen next year.”

A presidential office official stated, “Since next year’s economic situation is also expected to be difficult, it is urgent to change the system to endure the recession and grow. The victims who suffer directly from delays in bill processing and reforms due to political strife are ordinary citizens and vulnerable groups. Government task bills should not become targets of political conflict.”

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