The next year's biggest tax deficit? The government should strongly express its will to supplement the extra budget.

■ Broadcast: YTN Radio FM 94.5 (09:00-10:00)
■ Host: Reporter Cho Tae-hyun
■ Air date: December 24, 2024 (Tuesday)
■ Talk: Professor of Economics at Inha University, Chun So-ra

* The text below may differ from the actual broadcast content, so please check the broadcast for more accurate information.

◆ Reporter Cho Tae-hyun (hereinafter referred to as Cho Tae-hyun): It's a time to learn economic stories that can be helpful to know one step ahead of others. It's time to reveal the heaven. Today, we invited Professor Chun So-ra of Inha University's Department of Economics to the studio. Please come in.

◇ CHEN SORA, Professor of Economics at Inha University (hereinafter CHEN SORA): Hello.

◆ Cho Tae-hyun: Not only last week, but also the stories we have often told, small business owners and self-employed people have been directly hit by the impeachment of martial law. I've been talking about this. I've heard about how hard it is by connecting to the Korea Federation of Small Businesses, but I think the government has come up with measures. What were the contents?

◇ Chun So-ra: First of all, various measures have been pouring out since the martial law crisis. But this problem has been accumulated since before the impeachment of martial law. So, since then, we have been working on some measures such as public welfare debates, and political uncertainty has increased from impeachment to martial law. So on December 5th, it will add 200 billion vulnerable small business-handling loans. So I'm going to increase the number of financial aid sets. I said this before. And in July, we announced a comprehensive plan for small business owners, and we will strengthen our financial measures in this way of expanding our targets and expanding our scope. That's what happened. And on the 11th, one of the most prominent damage to small business owners' livelihoods is no-show or malicious reviews. There are cases where there are some well-intentioned victims, and the Fair Trade Commission will investigate these closely and come up with measures to improve consumer dispute resolution standards. There are comments like this. And on the 17th, we will lower the card fee rate for small business owners. So, let's set fees differentially according to the size of sales, so let's reduce the fee burden a little, these things are going back and forth.

◆ Cho Tae-hyun: Personally, I think lowering the fee has a problem that causes side effects on the other side, but anyways, various measures have been taken. There were also financial measures. Yesterday, the Federation of Banks made an announcement. What's in it?

◇ Chun So-ra: In the background, banks are in a position to receive money anyway, and those who received business loans will have to pay back all the money to the business bank, but Kim Byung-hwan, chairman of the Financial Services Commission, needs these things not only because of the bank's problems but also because of the risks in the economy as a whole. We talked about this, and the banking sector spent about 700 billion won a year and about 2 trillion won for three years to come up with various alternatives. So, in the case of existing business loans, we will be able to exchange them for long-term repayment products for up to 10 years. So if you change products like this, you'll get a prepayment fee, but I'll exempt you from these things, too. That's what we're talking about. And one of the concerns of these things is that there will be self-employed people who have faithfully paid interest expenses, and there is a possibility of reverse discrimination. We also announced interest rate reduction measures for such faithful repayors. And I'll also consider some additional business loans aimed at investing in a certain amount of self-employed people who are competitive in the business. That's what I said. Another thing we talked about a lot, but there were companies that couldn't close even if they wanted to. Rather, there were companies that lived with certain oxygen respirators, and these alternatives were prepared so that they could be paid in installments for up to 30 years so that they could close their businesses well, and they could close their businesses by paying back money. And in debtors, we don't only see individual businesses, but it's also difficult for large corporations. So, there are also problems such as expanding it to a corporation and what should they do next. So I will consult at the bank level, so support services and financial measures that I can't use because I don't know them well. So I will promote these things and do these things at the financial level. In the meantime, it was centered on policy financial products, but this system seems to be supplementing the financial system at the private level.

◆ Cho Tae-hyun: Well, in a good way, it's private level. In a bad way, it can be seen that the authorities twisted the bank's arm, but they introduced many measures overall. If you grade these measures, how much would you give me?

◇ CHEN SORA: First of all, if we talk about good things, we will expand the scope of support and provide customized services. In this respect, I think it will work in the short term. There are debts that have been accumulated since the COVID-19 era. But it's very questionable whether this can solve the problem structurally. On the contrary, it could lead to a situation where you get out of the hole of debt that you have to pay off for 30 years. There are those problems, and this is an act of banks voluntarily participating and collecting these funds, but this is a measure that banks should also take at the expense of losses. Then, from the perspective of small business owners, they would like this to be continued rather than one-off, but there is also a question of whether this will be sustainable. So in order for this to continue in any institutional way, there should be some incentives or incentives for banks to do this. These things are hard for both you and me, so let's work together. There may be a backlash because these things may be against personal interests and against the interests of the banking sector.

◆ Cho Tae-hyun: Considering the shareholder value, it might not be appropriate. Therefore, it seems that the value-up of the banking sector has gone out of the blue. But as you said, these measures can reduce the immediate debt risk, but the debt remains the same. In this respect, it seems that the economy needs to revive in order to be fundamentally resolved in the end, but how is consumer sentiment in the current economic situation?

◇ CHEN SORA: I don't think I've ever seen this number of consumption right now, but the consumer indicator retail sales index that we see every month at the National Statistical Office has been negative since 2022.

◆ Cho Tae-hyun: What do you mean by minus?

◇ CHEN SORA: In consumption, as we continue to fix the inflation rate, the absolute scale of consumption itself is decreasing anyway. You might think that this is a time lag. So the indicators that we're looking at now look at the indicators about two months ago, so there are some real-time credit card data that the National Statistical Office is releasing. You can compare those things until the previous week, and if we compare just before and after the martial law incident, of course, there will be temporary volatility, but it has decreased by about 26%.

◆ Cho Tae-hyun: There's a clear difference.

◇ CHEN SORA: So credit card sales are going down and we can't see the psychology, and we have a time difference in the numbers that we've announced, so we can't see this psychological blow right now. However, the bad things from before can be a bit more burdensome. You can think of it like this.

◆ Cho Tae-hyun: The period when politics gives attention and concern to the people continues. So the government and political circles continue to urge small business owners to spend some money, but it's not that people don't spend money, but I don't have money even if I want to eat out right now. Isn't there an aspect where you can't use it because you don't have money?

◇ CHEN SORA: Yeah, so the underlying cause of why consumption is bad seems to be driving this impeachment and martial law, but that's not the case. There may be aspects that the structural structure has increased any burden, but consumption has continued to slow down since then, and in the case of KDI, domestic demand has continued to be sluggish. I've been mentioning this continuously. So if you think about it big, you don't have the money to spend it like you said. Disposable income continues to decline.

◆ Cho Tae-hyun: What is disposable income?

◇ CHEN SORA: If you pay interest and pay taxes on my income and you look at the things that I can really use, you don't have much money to spend, and a lot of that is where some of our earned income is tied to some debt. This debt accounts for a large portion of the private sector in Korea, mainly in the main bank. And not only these things, but not long ago, the Korea Rural Economic Research Institute conducted a food consumption behavior survey, and compared to last year, the proportion of inflation felt by households was about 19.6%. That's how much the perceived price, called shopping basket price, is recognized.

◆ Cho Tae-hyun: I'm feeling a much higher inflation rate than the prices on the index.

◇ Chun So-ra: We're talking about prices in the 1% range, but prices have already risen, and these can be quite a burden, so if you really exclude the essential consumption, you have really limited capacity to eat out and stay like this. Because of this, there are structural causes, but consumers are also starting to become smart. Even if I buy one product, I spend money on cost-effectiveness, and consumers who neglected price comparisons a little before turn on the app and compare prices to find a cheaper place, which can make it more difficult for local self-employed people. As competition rises to the surface, various structural changes in consumer behavior and structural reduction in disposable income are combined with changes in consumer behavior that are forced to move to cheaper places when information is disclosed transparently. You can see it like this.

◆ Cho Tae-hyun: In a way, it's a total catastrophe.

◇ [Voiceover] Yeah, it's like looking at a knot tied together.

◆ Cho Tae-hyun: So do we have to say that there is room for this to break through and that this situation will continue in the future?

◇ Chun So-ra: Anyway, when I asked the self-employed as well as small and medium-sized enterprises what was the hardest thing, the first thing I did was the bad economic situation. In other words, sales are not good, and the second thing is rising costs and labor costs.

◆ Cho Tae-hyun: Sales are not increasing, but costs are increasing.

◇ CHEN SORA: Yes, that's right. The third thing that we can do with monetary policy is interest expense, but the last thing that we can do with monetary policy was the third thing that we answered. So even if you give interest expenses, if the economic situation, certain labor costs, and rising raw material costs are not solved, the difficulties of some self-employed people can go to a situation where it is difficult to improve.

◆ Cho Tae-hyun: It means that monetary policy alone cannot solve this situation.

◇ CHEN SORA: Yes, that's right. So, the monetary policy has already cut the benchmark interest rate in November, but the loan interest rate is still high because we are blocked by loan regulations and various things, and not only interest rates but also inflation rates are only 1%, and it is difficult to say that the economy will improve.

◆ Cho Tae-hyun: You mentioned the exchange rate a while ago, but the exchange rate continues to be high. Given that this situation continues in the mid- to long-term, isn't it difficult to expect an economic recovery next year?

◇ CHEN SORA: Of course, there are positive factors in theory when the exchange rate goes up. It leads to an increase in sales for export companies, but if the increase in raw material prices is accompanied by an increase in costs or this does not lead to a sufficient trickle-down effect, the economy as a whole has no choice but to go. So, the situation where exports and domestic demand are still separated has continued, but these things may not be solved and may remain. What will be the problem if the exchange rate is prolonged? If the exchange rate rises temporarily, it can be moved on without stimulating prices. If the exchange rate continues to rise, in the end, rising import prices, rising gas prices when it's very cold in winter, and electricity bills will eventually lead to worsening financial burden due to public corporation debt. So if this doesn't end up as a temporary event, we're going to face a very financially burdensome situation.

◆ Cho Tae-hyun: I'm also wearing thick clothes at home these days. Looking at the exchange rate today, it exceeded 1450 won again. Do you think this exchange rate will continue to be this high?

◇ Chun So-ra: This is a field that I don't do, but it's a difficult field and it's not easy to say, but even if we cut interest rates in the U.S. right now at the FOMC, we're going to slow down the rate cut in a situation where there's this big mid- to long-term inflation risk, and there's still room for a strong dollar. And anyway, not only external factors but also concerns about national fundamentals at a time when political uncertainty is high internally. The Bank of Korea recently announced its potential growth rate, and the fact that the currency value of Korea, including national credibility, is reflected in the exchange rate may lead to the exchange rate, so I think the exchange rate will be able to come back this quickly, such as 1,200 won and 1,300 won. I think we should be prepared to pass it by that this exchange rate will continue to some extent.

◆ Cho Tae-hyun: I don't know how much, but the high exchange rate itself is likely to continue. Therefore, like a universal solution, the creation of an additional budget for correction is what the political circle is talking about now. The government is talking about spending next year's budget in the first half of the year and then seeing the situation, so which side will you support more emotionally?

◇ CHEN SORA: First of all, we've been having problems with tax revenue deficits under this administration. When we look at the vivid economic time, we wonder if it will be possible to predict tax revenues next year. The semiconductor cycle will return, but there is room for corporate tax not to come in as much as Trump retakes power and various negative factors overlap. So anyway, if we don't have enough revenue, we'll still have another tax deficit. Whether it's a fund or a bond issue, we'll have other forms of revolving-blocking administration, which can lead to other financial resources not being spent where they need to be. So I'm thinking about what kind of revenue I'll need next year when I'm short of it. However, I think there will be some differences in opinions on where to use it, how large it is, and when it is executed. Anyway, I'm thinking that I'll still need it next year.

◆ Cho Tae-hyun: We need to hurry up and do it right now. What do you think of this argument?

◇ Chun So-ra: First of all, the budget we saw a while ago was processed. So, it was processed in a reduced form, and the reserve funds were cut a lot, and reserve funds are used as a concept of emergency when it is really necessary, so I think it is a political rather consistent behavior to pursue it right away. However, in terms of the fact that there are a series of unexpected events at that point when the Bank of Korea cuts interest rates, the ruling and opposition parties will lose some tax revenue rather than continuing to discuss the budget for a long time. Therefore, it means that there may be no financial resources in the second half of the year to implement it early in the first half of the year. It could be the same thing.

◆ Cho Tae-hyun: I mean I'm washing my fingers.

◇ CHEN SORA: So the government is also considering an extra budget with the possibility of a tax deficit in mind. If you express this will more strongly, it may affect the exchange rate or something. However, I think we should take these things more carefully, such as where and how to use them at that time or right now.

◆ Cho Tae-hyun: It's not just against it, but we need to approach it more precisely. Let me ask you one last question. Now, the opposition party is strongly talking about local currency to support small business owners. How do you rate this?

◇ CHEN SORA: I think there's a lot of disagreement among different economists. First of all, there is also a positive aspect of issuing local currency. In terms of revitalizing the local commercial district and boosting the vitality of some minority environment, but if a competitive local currency is issued for each local government, in the end, I am a Seoul citizen, but there was a company that bought some commercial districts in Incheon or other Gyeonggi-do, and it has to be used only in Seoul. So, if you look at the overall economy, where sales in other regions are decreasing, there may not be much change. We have to wait and see, but we can't rule out a situation where issuing government bonds to raise funds for these things, increasing government debt, rising interest rates everywhere, or shrinking private investment due to rising market interest rates. So I'm thinking that we need to approach it more precisely.

◆ Cho Tae-hyun: I've even heard that the macroscopic effect may not be great for money. So far, I have reviewed the economic situation comprehensively with Professor Chun So-ra of Inha University's Department of Economics. Thank you for talking today.

◇ CHEN SORA: Thank you.

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