[Weekly Review] Producer Prices Hit Record High... Yoon Government Drastically Cuts Corporate and Income Taxes

Announcement of Tax Reform Plan... Largest Revenue Decrease Since MB
Producer Prices Surge Due to Global Supply Chain Disruptions
Europe Also 'Big Step'... Major Countries Continue Interest Rate Hikes

As vegetable prices soar due to early heatwaves, poor crop yields, and delayed shipments, increasing the burden of food costs on consumers, citizens are shopping at a large supermarket in Seoul on the 17th. Photo by Hyunmin Kim kimhyun81@

Due to global supply chain disruptions and the aftermath of the Ukraine war, domestic producer prices have once again reached an all-time high. Since producer prices affect consumer prices with a time lag, domestic inflationary pressures are expected to intensify further.

Amid growing economic uncertainties, the government announced this week the new administration's first comprehensive tax reform plan, which overhauls corporate tax, income tax, and comprehensive real estate tax. While expectations arise that corporate competitiveness will be revived as tax revenues are projected to decrease by more than 13 trillion won through this reform, some critics argue that it amounts to a 'tax cut for the wealthy.'

Producer Price Index Hits Record High... Inflation Concerns Persist

According to the Bank of Korea on the 23rd, the producer price index for June stood at 120.04 (2015=100), rising 0.5% from the previous month. This marks the sixth consecutive month of increase and the highest level since statistics began. Amid soaring international raw material prices, food ingredient prices continue to rise, showing an unstable trend.

Agricultural, forestry, and fishery products increased by 0.7% month-on-month, led by agricultural products (1.2%) and fishery products (3.0%). Notably, onions surged 84% compared to the previous month due to poor harvest conditions. Rockfish and cutlassfish also rose by 19.7% and 11.8%, respectively.

Among manufactured goods, diesel (9.8%) and gasoline (11.2%) prices saw significant increases, while service prices such as hamburger and pizza specialty stores (1.8%), international air passengers (4.1%), air cargo (3.4%), and magazines and periodicals (5.2%) also rose consecutively.

With producer prices rising sharply, the consumer price inflation rate, which has already entered the 6% range, is expected to remain at a high level for the time being.

European Central Bank Also Takes a 'Big Step'... Interest Rate Hike After 11 Years

As global inflation continues, the European Central Bank (ECB) took a 'big step' (a 0.5 percentage point base rate hike) on the 21st (local time), marking the first such move in 22 years. This is the ECB's first interest rate increase since July 2011, after 11 years.

At last month's monetary policy meeting, the ECB had planned to raise the base rate by 0.25 percentage points this month, but due to inflation rates continuing higher than expected, it doubled the increase to a big step.

ECB President Christine Lagarde explained at a press conference, "The 0.5 percentage point increase was decided unanimously," adding, "This is because inflation remains undesirably high and is expected to stay above the target for some time."

Following aggressive rate hikes by the U.S. Federal Reserve (Fed), central banks of major countries, including Europe, are actively raising interest rates. According to major foreign media, central banks in 55 countries worldwide raised interest rates by at least 0.5 percentage points 62 times during the second quarter.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho adjusted his glasses while attending the detailed briefing on the '2022 Tax Reform Plan' held at the Government Complex Sejong in Sejong City on the 18th.
[Photo by Yonhap News]

Yoon Administration's First Tax Reform Plan... Significant Tax Revenue Decline

The Yoon Seok-yeol administration announced a tax reform plan with a tax cut policy on the 21st. This reform focuses on enhancing the dynamism of the private sector, corporations, and markets, improving resource allocation efficiency, and normalizing the excessively high tax burden from the previous administration.

Accordingly, the reform plan includes lowering the top corporate tax rate, simplifying tax base brackets, abolishing multi-homeowner surcharges on comprehensive real estate tax, reducing tax rates, increasing deduction amounts, raising income tax brackets for earned income, and easing inheritance and gift taxes.

The tax reform is estimated to reduce corporate tax revenue by 6.8 trillion won and income tax revenue by 2.5 trillion won. Total tax revenue is expected to decrease by more than 13 trillion won, the largest scale in 14 years since 2008, the first year of the Lee Myung-bak administration.

The government expects that tax cuts will strengthen corporate competitiveness and revitalize the private economy. In the mid to long term, corporate investment and employment may also increase. However, since the tax revenue reduction effect is greater for corporations and high-income earners than for ordinary and middle-class citizens and small to medium-sized enterprises, concerns have been raised that it could exacerbate polarization.