[Initial Insight] The Arrival of the Policonomy Era

"Shouldn't we allocate this year's contingency funds more generously than expected in preparation for Trump's possible election?"

One of the frequently discussed topics among Ministry of Economy and Finance reporters these days is 'Trump.' This comes as news arrives that former President Donald Trump has won the party primaries in New Hampshire following his victory in Iowa against former UN Ambassador Nikki Haley. Although the primary process is not yet over, the prevailing expectation is a 'rematch' between the current president and the former president in the upcoming U.S. presidential election this November. Every time news surfaces that Trump is leading in a head-to-head contest against Biden, the nightmare of 'Trumpism' is revived.

While the outcome cannot be predicted, if Trump is re-elected, it is expected to pose a considerable burden on South Korea. Especially since there were significant difficulties with the defense cost-sharing agreement during the Trump administration, a similar situation is likely to recur. During the 10th defense cost-sharing negotiation, the U.S. side demanded a 50% increase, which eventually led to a breakdown in talks that extended beyond the year-end, and even contingency funds were mobilized. Although there are reports that South Korea and the U.S. are starting defense cost negotiations early this year in preparation for the Trump era due to the increased possibility of his election, it does not seem easy to completely avoid the 'Trump risk.'

We are entering a period where politics shakes the economy, so-called 'Policonomy.' This is not only because of Trump. Ahead of the April general election, there have been several cases in South Korea where politics is impacting the economy. A representative example is the failure of the revised bill to postpone the Serious Accident Punishment Act for two years, which was ultimately rejected in the National Assembly on the 25th. Starting from the 27th, the Serious Accident Punishment Act will apply to workplaces with fewer than 50 employees, increasing uncertainty for business owners running small enterprises. This law applies not only to well-known construction and manufacturing companies but to any workplace with five or more employees, meaning that even if an employee gets injured while frying chicken, the chicken shop owner could be held responsible. The already frozen economy may further cool down due to the enforcement of the Serious Accident Punishment Act.

There are more problems. The government's economic policy directions for the new year may be blocked in the National Assembly, preventing them from being effectively implemented. Legislative approval is required for all the measures proposed in the economic policy directions, such as the extension of temporary investment tax credits, temporary increases in deduction rates for additional research and development (R&D) investments, tax benefits for second home purchases, a 20% deduction on increased card spending in the first half of the year, and an increase in the traditional market consumption deduction rate (from 40% to 80%).

However, it is uncertain whether these legislative matters will pass smoothly in the National Assembly, where the ruling party holds fewer seats than the opposition. Although the February extraordinary session of the National Assembly is expected to convene, it is unclear whether the Planning and Finance Committee, which would discuss these legislative issues, will be held. Card spending deductions and traditional market deductions are related to public welfare and may see bipartisan agreement ahead of the general election, but tax benefits for corporate R&D are likely to face sharp opposition between parties, making passage difficult.

Policonomy is worrisome because once it begins, it does not easily disappear and can continuously negatively affect the economy. Especially for the South Korean economy, which is sensitive to external factors, it could suffer greater damage amid the global whirlwind of policonomy. This is a time when political and economic actors need to make concessions and cooperate. The chaos caused by the failure of the Serious Accident Punishment Act revision may be just the beginning of policonomy.

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