Government Likely to 'Extend' Fuel Tax Reduction Next Year... Considering the Reduction Scale

[Asia Economy Sejong=Reporter Son Seon-hee] The government is strongly considering extending the fuel tax reduction policy at least until the first half of next year. However, since international oil prices are at their lowest level in nearly a year due to concerns about an economic recession, the reduction rate is expected to be gradually scaled back.

According to the Ministry of Economy and Finance on the 8th, the extension plan for the fuel tax reduction is expected to be included in the "2023 Economic Policy Direction" to be announced around mid to late this month. Since mid-November last year, the government has applied a 20% fuel tax reduction as part of measures against high inflation, and expanded the reduction rate twice this year, in May (30%) and July (37%). The originally temporary reduction period has also been extended repeatedly, currently set to apply until the end of this year, so a decision on further extension within the year must be made.

The government has tentatively decided to extend the fuel tax reduction itself for the time being. Although international oil prices, which had surged sharply since the second half of last year, have recently fallen to the level at the end of last year (mid-$70s per barrel) due to concerns about weak demand amid an economic recession, they are still higher than the average level. External uncertainties such as the price cap on Russian crude oil also remain significant. Additionally, domestic inflation is expected to continue hovering around 5% for the time being, making it practically impossible to immediately withdraw the fuel tax reduction, which directly affects fuel prices.

However, there is ongoing deliberation over the extent of the fuel tax reduction. Given the growing concerns about economic slowdown next year, additional revenue loss is a burden for the government. The total revenue loss due to the fuel tax reduction, which has continued throughout the year since the end of last year, is estimated to reach 9 trillion won. This means government income has decreased by that amount.

Accordingly, the Ministry of Economy and Finance is internally discussing a plan to gradually reduce the fuel tax reduction rate by comprehensively considering trends in international oil prices and domestic inflation. When the 15% fuel tax reduction policy was first implemented in 2018, it was reduced to half (7%) in April of the following year, applied additionally for four months, and then reverted. Since the current reduction rate is much larger than at that time, it is likely to be gradually scaled back through several stages.

However, the ministry is negative about further expanding the reduction rate regardless of fuel types such as diesel or gasoline. Although the National Assembly passed a bill in August to expand the statutory fuel tax reduction rate up to 50%, international oil prices are declining, and organizations like the OECD have criticized that "fuel tax reductions actually encourage fuel consumption and run counter to carbon neutrality." A Ministry of Economy and Finance official said, "It is certain that the fuel tax reduction rate will not be further expanded given the current (economic) situation."

[Image source=Yonhap News]