On December 20, the government announced its economic policy guidelines for next year. The political objective for 2022 is to overcome the crisis of the COVID-19 pandemic and fully normalize the economy. The government expects this year’s recovery momentum to continue into next year, with exports and investment maintaining their upward momentum and domestic demand picking up. It forecasts the South Korean economy to grow 4% in 2021 and 3.1% in 2022.
Here is Kim Dae-ho, director of the Global Economic Research Institute, to review the outline of the government’s economic policy for 2022.
South Korea’s economy posted negative growth in 2020, the first year of the pandemic. The government forecasts 3.1% growth for 2022 after expanding 4% this year. The growth target for next year is up 0.1 percentage point from the previous estimate. This figure may seem insignificant, but it reflects the government’s commitment to achieve a strong and rapid recovery in cooperation with economic actors and to focus on expansionary growth next year.
For the Korean economy to grow by 3% next year, there is an urgent need to boost domestic demand. To this end, the government will maintain its expansionary fiscal policy next year. In other words, it will free up more money to kick-start domestic demand and investments that have yet to recover from the economic shock of the pandemic.
In more detail, it will introduce special tax deductions on extra spending in traditional markets and provide more discount coupons. It will also scrap duty-free shopping caps for Korean nationals for the first time in 43 years, in a bid to bolster the duty-free industry and encourage tourists to spend more in South Korea than abroad. foreigner.
The government will spend US$97 billion to implement state-run projects and stimulate private investment. It will designate 65 technologies in different areas, including semiconductors and batteries, as “national strategic technologies” and extend the tax benefits they enjoy. It will also invest $28 billion in implementing the so-called Korea New Deal 2.0 initiative next year.
In addition to achieving economic normalization beyond the pandemic, the government’s policy direction for 2022 also aims to invest heavily in future businesses and new technologies, including those related to semiconductors, batteries and the hydrogen economy. In doing so, South Korea seeks to transition to a value-creating economy. The country hopes that this vision will take firm root in 2022.
The outline of government policy for the next year includes support for vulnerable groups in society. As the omicron variant spreads and the number of critical COVID-19 cases hits new highs for days in Korea, the government has tightened social distancing rules. Just a month after the nation began its gradual return to normal plan, the tightening of anti-virus measures has put small business owners and the self-employed in an even more difficult situation.
For those who have been hit hard by the pandemic, the government will provide $30 billion in low-interest loans. More businesses, including hair salons, hair salons and others, will be entitled to compensation for losses. The lower quarterly compensation limit for small businesses will be increased to $420 from the current $84.
Speaking of inflation, which is another major economic concern along with growth, the government expects inflation to reach 2.2% next year.
Promoting growth and containing inflation are two fundamental objectives of the economy. South Korea will target 3.1% growth and 2.2% consumer inflation next year. High inflation is not good because it can hamper growth. If the government has to choose which objective takes priority, I think it should focus more on controlling inflation.
The government plans to freeze the prices of utilities such as electricity and gas bills in the first quarter of next year, in a bid to mitigate the impact of rising prices on people’s livelihoods . The ongoing fuel tax cut is supposed to last until next April, but the government may extend the measure. The problem is that the policy of stimulating domestic demand can come up against the policy of controlling inflation.
On another worrying note, the resurgence of COVID-19 cases and the appearance of new variants are adding uncertainty to the economy. The spread of new variants next year is expected to delay the recovery of domestic demand, slow global economic growth, prolong supply chain disruptions and stoke inflation.
Some point out that the South Korean government is too optimistic about the economy next year, especially the pandemic situation. There are also external risk factors. Tensions are mounting between the United States and Russia over a possible Russian invasion of Ukraine. Oil and natural gas prices may jump again. South Korea’s growing debt is another serious problem. During the payment of the national debt, the country can issue more government bonds, but this decision could lead to higher interest rates. Considering all this, the government needs to design policies more meticulously.
Inflation rose around the world, prompting central banks in many countries to prepare to raise their key rates. On December 16, the Bank of England raised its interest rates to 0.25% from 0.1%. It is the first major central bank to raise interest rates. Many countries are now moving towards tight monetary policy, abandoning their previous stance of monetary easing aimed at keeping the pandemic-hit economy afloat. As a result, uncertainties are expected to grow in emerging economies, while global financial markets could face increased volatility.
In South Korea, the presidential election is scheduled for March 9, 2022. Next year, the country will have to deal with various factors both inside and outside the country.
I imagine that the economy of the country and the world economy will be doing well next year. The world has now gained confidence that it can overcome the pandemic crisis, with some countries gradually recovering from the aftermath of the pandemic. When the pandemic is over, pent-up demand will explode, while investment, consumption and exports will all increase. In particular, South Korea’s exports have remained strong to reach a record high this year.
Overall, the country’s economy is improving and faces a great opportunity for another take-off. One of the most important tasks is to find the right balance between growth and inflation and to manage the increase in the national debt.
Despite the ongoing pandemic, South Korea’s exports hit a new all-time high in 2021, successfully turning crisis into opportunity. The country should be able to show its great potential again in 2022 so that the government’s economic policies are properly implemented as planned. It is also hoped that an improvement will be brought not only in the economic figures but also in people’s livelihoods.