[The Editors' Verdict] Is the Government and Ruling Party Preparing for 'Winter'?

[Asia Economy Reporter Choi Il-kwon] "The government should be worried about winter even in the middle of summer. However, seeing that they are only considering an additional reduction in the fuel tax rate, I am concerned whether they are truly prepared for the coming winter. It may even be necessary to provide subsidies in addition to the fuel tax cuts."

A high-ranking government official I met privately recently expressed concerns about the fuel tax reduction measures currently being promoted by the political circles and the government. It sounded like a warning that the current measures being prepared are far from sufficient to control inflation. As we move past summer and enter a season with increased energy demand for heating, energy prices will rise even more, so can a mere reduction of about 150 KRW per liter really be effective?

Since the 1st of this month, the government has lowered the tax on gasoline and other fuels at gas stations by 37%. Arithmetically, gasoline should be 57 KRW cheaper per liter and diesel 38 KRW cheaper, but the actual perceived reduction at the field level is less than this.

The 37% fuel tax cut is the maximum measure the government can take under current law. As the sharp rise in oil prices is considered one of the main causes of inflation, the government has pulled out all the cards it can use.

In the political arena, there are plans to prepare an amendment to the Transportation Energy and Environment Tax Act to further expand the fuel tax reduction, and to process it with the opening of the second half of the National Assembly session. The ruling party has proposed a bill to increase the reduction rate to 50%, and the opposition is preparing a similar bill. Since there is not much disagreement between the ruling and opposition parties, there is growing weight to the possibility that the flexible fuel tax rate will be increased to 50%. If 50% is specified in the law, the government can reduce it by up to 55%. If applied to the maximum extent, gasoline prices would drop by about 150 KRW per liter and diesel by more than 100 KRW compared to now.

However, given the still unstable trend of international oil prices, it is questionable whether simply raising the fuel tax reduction limit to 50% will be sufficient. The average gasoline price in Seoul, as announced by Opinet, is recently 2,175 KRW per liter, and even if the fuel tax is halved, the fuel price will still exceed 2,000 KRW. The effect of the tax cut is likely to be offset by the rise in oil prices.

Due to uncertainties in the international situation, the strong trend in international oil prices is expected to continue. Currently, international oil prices have exceeded 100 dollars per barrel, and forecasts that it will surpass 150 dollars per barrel in the second half of this year are gaining traction. There are also predictions that it could soar to 200 dollars if heating demand in Europe increases during winter. If fuel prices surge to 2,500 or 3,000 KRW, the 50% expansion of the fuel tax rate, which political circles use as a guideline, will only be a token gesture.

Rather, in preparation for a rapidly changing future, it is necessary to consider lowering the fuel tax to the exemption limit so that it is not imposed depending on the situation. Currently, a bill proposing to expand the flexible fuel tax rate to 100% has been submitted to the National Assembly. Even if the law specifies a flexible fuel tax rate of 100%, this is intended for extreme situations, and the government can apply it flexibly within that range. It means the tax can be reduced up to 100%, but it does not mean it must be applied.

The government and ruling party oppose lowering the fuel tax by more than 50%, arguing that it violates tax principles. If the fuel tax rate is halved but oil prices rise further, offsetting the effect, how will they respond then? In a situation where sound fiscal management is emphasized, providing subsidies is also not easy. All preparations must be made before 'winter' arrives.

President Yoon Suk-yeol emphasized 'freedom' 35 times in his inaugural speech. This contained a signal for private and market-led growth. While tax revenue is important, it is now more crucial to take a stance that firmly lowers prices and soothes economic sentiment.