Seoul snubs calls for tax cuts to revive flagging economy
The government has rejected opposition calls for major tax cuts as politicians debate how to stem an alarming slide in the economy.
The Grand National Party (GNP) demanded the tax cuts to lift flagging investment and private consumption amid fears South Korea could suffer a bout of stagflation - stagnant growth but high inflation.
GNP policy chief Lee Han-koo has led the charge for tax cuts, hoping to influence next month's budget-setting debate in parliament.
'The government should cut taxes to increase consumers' disposable income and give more room for corporate investment,' he said.
Finance Minister Lee Hun-jae has ruled out trimming tax rates, saying it hurt state revenues without boosting consumer spending.
The government-backed Korea Institute of Public Finance also dismissed the proposal, saying tax cuts would take at least six months to introduce and were inappropriate as a way of delivering a short-term economic fillip.
The Uri party, which backs President Roh Moo-hyun and has the majority in parliament, is demanding higher government spending to prop up the economy.
It wants the extra money spent on public infrastructure, research and development and education next year to fuel growth.
'The government's current budget draft for 2004 is not enough to cope effectively with a recession,' Uri chief policymaker Hong Jae-hyong said.
'The party plans to demand further expansion of budget spending and a more aggressive fiscal policy.'
Seoul has forecast healthy 5 per cent growth in gross domestic product, with most of the expansion from surging exports, particularly to China.
But the domestic economy is still struggling, with weak consumer and business confidence.
In the first three months of this year, private consumption and capital investment fell for the fourth consecutive quarter.
Meanwhile, inflation is threatening to gather pace, particularly from record high oil prices.
Taxes have increased sharply despite strong economic growth, helping to boost government revenues, the private think-tank Samsung Economic Research Institute says in a paper released this week that argues for tax cuts.
South Koreans are now paying on average 22.7 per cent of their income in taxes, according to the think-tank, compared with 21.7 per cent in the United States and 17 per cent in Japan.
Opposition politicians have warned that the government runs the risk of creating a large budget deficit if it aggressively expands spending.
