Markets notice little of Bahk’s inflation fight

Three months into his term as the country’s finance minister, Bahk Jae-wan’s efforts to tame inflation and stabilize the market have received little notice in an economy at risk of excessive debt at home and abroad.

And economic indicators spell trouble for Bahk.

Coming into office on June 2, he prioritized fighting inflation, but the on-year inflation rate has averaged 4.8 percent for the past three months.

Economists say Bahk came in too late to improve the situation.

“Bahk should not be blamed for worsening consumer prices. There was little the government could do with natural disasters, oil price hikes and debt crisis in major trading partners,” said Lee Jong-woo, chief of research at Solomon Securities.

Among the first things his team did was lower the growth forecast and raise the outlook for inflation. After Consumer Price Index stayed above the target rate of 2 to 4 percent, Bahk’s team on June 30 raised the inflation outlook to 4 percent, up from the 3 percent projected earlier. It cut the growth forecast to 4.5 percent from 5 percent, backing off from the ambitious growth plans set before Bahk. 

“Bahk should be appreciated for his efforts to contain price surges with a less ambitious growth target, but they were too little, too late,” said Ha Joon-kyung, an economics professor at Hanyang University.

The close confidant of President Lee Myung-bak made few changes to existing economic policy, except for in the area of tax rates. In the 2011 tax revision bill released Wednesday, the Finance Ministry and the government decided to scrap its earlier plans to reduce the corporate tax rate, giving into pressure that more tax revenue is needed for growing welfare expenditure. The move is seen as a political compromise to woo a disenchanted public ahead of the general elections next year.

“In general, Bahk is still viewed as a dependable mouthpiece of President Lee. The market doesn’t expect much surprise or policy changes from Bahk until the end of the Lee administration next year,” Lee of Solomon Securities said.

The new tax bill retains the 22 percent corporate tax rate, reversing earlier plans to lower it to 20 percent for companies making more than 50 billion won in taxable income. The highest income tax rate of 35 percent will remain for wealthy individuals with annual taxable income of more than 88 million won. Bahk said the 3.5 trillion won of incremental tax revenue from the new plan will be spent for the poor.

Bahk served as the labor minister for a little more than a year before he was appointed to head the Finance Ministry. The Harvard University graduate of public diplomacy served twice as Lee’s senior planning secretary and chief secretary.

By Cynthia J. Kim (cynthiak@heraldcorp.com)