Korean gov’t mulls extending fuel tax cut for 3 more months amid high oil prices

A gas station in downtown Seoul on Aug. 15. [Photo by Yonhap]

The South Korean government is considering extending its fuel tax cut that is set to expire at the end of this month for three more months amid surging oil prices that may place a burden on the public.

According to the government on Tuesday, the Ministry of Economy and Finance is pushing to extend the fuel tax cut until November. Details on the extension period will be announced this week.

Fuel taxes have been reduced by 25 percent for gasoline and 37 percent for diesel and liquefied petroleum gas (LPG).

The government first implemented the fuel tax cut in November 2021 and fuel has since extended it four times. The gasoline tax, which was 820 won ($0.61) per liter before the cut, was reduced by 37 percent to 516 won, and then to 615 won earlier this year when the cut was reduced to 25 percent.

Diesel taxes fell to 369 won per liter from 581 won per liter. When the cuts end in November, gasoline price is expected to rise to 205 won per liter and diesel to 212 won per liter.

Until the first half of this year, the government was likely to not extend the fuel tax cut due to lack of tax revenue.

In the first six months of this year, national tax revenue fell by 39.7 trillion won from a year earlier, with the transportation, energy, and environment tax, which includes the fuel tax, falling by 700 billion won during the same period.

The government’s continued fuel tax cut had contributed to the shortfall in tax revenue.

The government’s decision to extend the measures once again, nevertheless, is due to the recent high gas prices.

According to the Korea National Oil Corp., the nationwide average price of gasoline rose 8.5 percent to 1,695 won per liter in the second week of August from 1,562.9 won in January.

As of Monday, the national average price of a liter of gasoline reached 1724.3 won. The price of a liter of diesel fuel was also 1581.6 won, more than 50 won higher than last week’s average of 1526 won. This is due to the fact that Dubai crude oil, the benchmark for domestic imported crude oil, rose to $88 per barrel this month, the highest level this year.

As fuel prices are directly related to the livelihood of ordinary people, there are concerns that the adverse effects on overall prices will spread if the fuel tax cut is not extended.

While consumer prices rose 2.3 percent last month, the slowest pace in 25 months, core inflation, an index that excludes agricultural products and oil, rose 3.9 percent, continuing to add inflationary pressures.

Private consumption, a key driver of the economy, is also cooling rapidly.

According to the Bank of Korea, real gross domestic product (GDP) grew 0.6 percent quarter-on-quarter in the second quarter this year, but private consumption shrank 0.1 percent, led by food and accommodation services, dragging down the overall growth rate by 0.1 percentage point.

However, observers note that it will be difficult to extend the fuel tax cut measures for a long time as the country is expected to face a record tax revenue shortfall this year.

The government is also reportedly considering a gradual reduction in the diesel tax cut amid some voices that the diesel tax cut should be reduced to the same level as gasoline at 25 percent.