NABO Economic Trends & Issues (Issue No. 41)
Published March, 2016
I. Economic & Major Policy Trends
The Korean economy has recently shown less momentum for recovery, facing a slowdown in domestic consumption amid a prolonged slump in exports. To cope with the issues, the Ministry of Strategy and Finance announced an economic stimulus package in February to expand budget execution for the first quarter by more than KRW 21 trillion (fiscal: KRW 6 trillion, policy-based finance: KRW 15.5 trillion). The Special Act on Corporate Revitalization was also promulgated in February to ease M&A regulations and stipulate tax and financial support, thus promoting the restructuring of sectors with oversupply.
II. Characteristics of Korean Economic Growth in 2015
The Korean economy posted a growth rate of 2.6% in 2015, continuing its low-growth trajectory since 2011, as exports dropped due to worsening global economic conditions while the MERS crisis dampened domestic consumption. Receding oil prices helped improve trade conditions, which led to an increase in gross domestic income, as well as resulted in a low inflation rate of 0.7%. At the same time, investment showed a relatively good performance, led by the housing market, on the back of interest rate cuts and policies set to boost the property market, but the rapidly rising household debt needs to be managed.
III. Discussions on Changing Domestic Automobile Taxation Scheme and Overseas Cases
Currently, Korea imposes the automobile tax based on displacement. However, since the scheme has been increasingly revealing shortcomings in terms of tax equity as premium cars with a smaller displacement bear a relatively lower tax burden, this has triggered discussions on how to overhaul the standard. Among OECD and EU member countries, 40 mainly use weight (25 countries) and CO2 emissions (16 countries) as a standard to levy taxes on owning and operating vehicles, while 11 others adopt a displacement-based system. In order to frame the automobile tax more as an environmental tax in the mid- to long-term, Korea needs to review the overall automobile tax scheme, including the nation’s oil tax standard.
Ⅳ. Results and Tasks of the Reform of Bill Cost Estimation Policy
The National Assembly Act was amended in March 2014 (enforced on March 19, 2015) to stipulate that cost estimates of the bills proposed by members or committees of the National Assembly shall only be prepared by the National Assembly Budget Office (NABO) and that cost estimates shall be developed even for amended or alternative bills of the committees. Since its enforcement, the overall number of replies to cost estimates has soared with the increased number of cost estimate attachments to the bills proposed by the National Assembly committees. To help establish and develop the system further, it is necessary to continue to promote the utilization of cost estimates during the process of deliberation on bills, enhance the capacity of cost estimation, and expand external cooperation.
V. Current Status and Implications of Recent Power Supply at Home and Abroad
Korea suffered from an unreliable power demand and supply due to energy shortages in early 2010, but thanks to the stable supply in 2015, the government lowered household electricity bills. Under the Basic Energy Plan, the government has uniformly set a 22% target rate for facility reserves for the coming 15 years. However, in order to avoid such a recurring cycle of oversupply and shortage of power, the government should phase in a 7% target for the margin of error in demand in the long run as time will be allowed to address any demand error along the way.
The Korean economy has recently shown less momentum for recovery, facing a slowdown in domestic consumption amid a prolonged slump in exports. To cope with the issues, the Ministry of Strategy and Finance announced an economic stimulus package in February to expand budget execution for the first quarter by more than KRW 21 trillion (fiscal: KRW 6 trillion, policy-based finance: KRW 15.5 trillion). The Special Act on Corporate Revitalization was also promulgated in February to ease M&A regulations and stipulate tax and financial support, thus promoting the restructuring of sectors with oversupply.
II. Characteristics of Korean Economic Growth in 2015
The Korean economy posted a growth rate of 2.6% in 2015, continuing its low-growth trajectory since 2011, as exports dropped due to worsening global economic conditions while the MERS crisis dampened domestic consumption. Receding oil prices helped improve trade conditions, which led to an increase in gross domestic income, as well as resulted in a low inflation rate of 0.7%. At the same time, investment showed a relatively good performance, led by the housing market, on the back of interest rate cuts and policies set to boost the property market, but the rapidly rising household debt needs to be managed.
III. Discussions on Changing Domestic Automobile Taxation Scheme and Overseas Cases
Currently, Korea imposes the automobile tax based on displacement. However, since the scheme has been increasingly revealing shortcomings in terms of tax equity as premium cars with a smaller displacement bear a relatively lower tax burden, this has triggered discussions on how to overhaul the standard. Among OECD and EU member countries, 40 mainly use weight (25 countries) and CO2 emissions (16 countries) as a standard to levy taxes on owning and operating vehicles, while 11 others adopt a displacement-based system. In order to frame the automobile tax more as an environmental tax in the mid- to long-term, Korea needs to review the overall automobile tax scheme, including the nation’s oil tax standard.
Ⅳ. Results and Tasks of the Reform of Bill Cost Estimation Policy
The National Assembly Act was amended in March 2014 (enforced on March 19, 2015) to stipulate that cost estimates of the bills proposed by members or committees of the National Assembly shall only be prepared by the National Assembly Budget Office (NABO) and that cost estimates shall be developed even for amended or alternative bills of the committees. Since its enforcement, the overall number of replies to cost estimates has soared with the increased number of cost estimate attachments to the bills proposed by the National Assembly committees. To help establish and develop the system further, it is necessary to continue to promote the utilization of cost estimates during the process of deliberation on bills, enhance the capacity of cost estimation, and expand external cooperation.
V. Current Status and Implications of Recent Power Supply at Home and Abroad
Korea suffered from an unreliable power demand and supply due to energy shortages in early 2010, but thanks to the stable supply in 2015, the government lowered household electricity bills. Under the Basic Energy Plan, the government has uniformly set a 22% target rate for facility reserves for the coming 15 years. However, in order to avoid such a recurring cycle of oversupply and shortage of power, the government should phase in a 7% target for the margin of error in demand in the long run as time will be allowed to address any demand error along the way.