[Editorial] Confusing Economic Policies

The government and the ruling Uri Party announced yesterday that they would keep tax deductions to families with two or fewer members. The change of mind came three days after the Ministry of Finance and Economy said that it was actively reviewing tax deduction cuts on January 31.

This shows that the government’s tax policy, which directly affects millions of people, is fluctuating. And it is highly probable that yesterday’s decision would change again after the local elections are held on May 31, considering that an Uri Party Rep. added, “Regarding the timing of reducing the tax deduction, our party will discuss with the government when the party’s busy political schedule is over.”

It is President Roh Moo-hyun who created this confusion. The president intensified “confusion over taxes” by his stress on creating “the source of funding to resolve bipolarization” in his New Year’s press conference. The Ministry of Finance and Economy said on January 24 that it would push for a raise in the tax on soju (Korean liquor). That aggravated public opinion and surprised Cheong Wa Dae, which was actually pushing for the tax increase, and prompted the presidential office to send a verbal warning to the ministry saying that such a move would affect the outcome of the local elections.

The ruling party also halted the plan to eliminate additional tax deductions for double-income couples. These situations occurred because the participatory government wanted to gain votes and collect more taxes at the same time.

The confusion among Cheong Wa Dae, the cabinet, and the ruling party is adding to the already unstable economic situation. The government and the ruling party, which should be concentrating on resolving uncertainties surrounding major economic indicators, such as the foreign exchange rate, stock prices, and oil prices, are fueling a sense of instability. Exports totaled $23.2 billion in January, a mere 4.3 percent increase from the same month last year due to a sudden drop in the foreign exchange rate. Korea’s trade surplus was $590 million, one-fifth of that of last year. One-third of Korea’s small- and medium-sized export companies reportedly are in the red.

But even under these circumstances, the ministries of Finance and Economy and Commerce, Industry, and Energy are just quarrelling with each other over interventions in the foreign exchange market.

With the restructuring of household debt coming to an end, private consumption is recovering. Jobs have been created, and the income bipolarization has decreased as the recovery of consumption leads to facility investment. But stock prices fluctuate and economic forecasts become uncertain when the government focuses on increasing taxes on corporations and individuals as soon as signs of economic recovery become evident. To resolve the side effects of the economic slowdown, which has lasted five years since August 2001, the government should push ahead with policies focusing on growth, which can inject vigor into the private sector.