South Korea has joined rival Japan in revealing an emergency plan to cut taxes, inject cash and try and stimulate the economy.
Rather than injecting cash to stimulate demand like the US did in May to July with a $US100 billion tax rebate, South Korea is cutting taxes on income, especially for middle class consumers (and voters).
Japan revealed a US$105.8 billion (11,500 billion yen) economic stimulus package which includes an income tax cut, fuel subsidies and government loans to small and medium-sized companies.
It only included $A20 billion or so in actual fresh money injected into the economy: the rest involved loans and tax cuts for small and medium businesses.
And last night, three days after revealing that package Japanese Prime Minister Yasuo Fukuda said that he had decided to resign in an effort to break a political deadlock.
Fukuda has been struggling to cope with a divided parliament where the opposition parties control the upper house and can delay legislation.
He has been in office for less than the year and the LDP will now have to find a new leader. It leaves the future of the support package, announced only on Friday of last week, up in the air.
Now, South Korea, after spending tens of billions of dollars trying to support its currency, the won, has committed itself to cutting 20,700 billion won (or US$19.05 billion) in taxes in the next five years to try and boost growth.
The country’s finance ministry said in a statement yesterday that the government will collect 15,700 billion won less (or around 1.75% of the country’s 2007 gross domestic product) this year and the next.
Reuters and Bloomberg quoted Finance Minister Finance Minister Kang Man-soo as saying in a statement: "We must decisively reform unreasonable taxes that put pressure on the people and the economy.
"We will use the reform of tax policies to provide momentum for job creation and economic recovery,"
The tax cut plans come amid growing concerns that sluggish demand for the country’s exports, the credit crisis and weakening domestic demand will hit the country’s economy.
The government plans to cut income tax rates by 2% to ease tax burdens of middle-income people and to bolster domestic demand. It will also provide tax incentives to companies to promote more research and development.
This plan comes after South Korea announced a plan earlier tin the year to cut corporate taxes by around 15 billion won in lost revenue and tax cuts over the next five years.
The Government had obviously been working on the plan for sometime, but it came the same day as South Korean stocks fell to their lowest since March 2007 and the won weakened to above 1120 to the US dollar level for the first time in almost four years. It was trading around 1089 won on Friday.
The South Korean Central bank has been spending billions of dollars a week trying to bolster the won. In July alone it spent well over $US10 billion and it’s believed more was spent last month, to no avail as the currency continued to fall.
The main market index, the Kospi fell 3.9%, the steepest fall since January, while the currency fell 3.2%.
The market has fallen 22% this year on a combination of worries about the economy and the impact of the credit crunch on the vital US economy.
The country’s economy is still growing, but weakly as the weakening won boosts import prices at a time when food and oil prices have surged.
South Korean consumer price inflation slowed to 5.6% last month from a 10-year high of 5.9% in July as the oil price fell on global markets and food price pressures slowed.
South Korean exports are still growing with a 20.6% rise in August, compared to a year ago. But that was less than what the market had been expecting.
The won fell 7% in August, the biggest since the Asian financial crisis in 1998. The currency is down 19% so far this year against the greenback.
The intervention by the Government to support the won has not only failed to halt the decline in the currency, but it has brought a $US16.7 billion drop in the country’s foreign-exchange reserves in the the four months from May to July to $247.5 billion.
Some analysts reckon the bill so far for supporting the currency is over $US40 billion since January.
Foreign investors have sold $US23 billion more of South Korean shares than they bought so far in 2008, which has added to the pressure on the currency. The central bank is effectively underwriting their exit at no real loss.
