Will the Fuel Tax Cut Be Extended... If It Continues in the Second Half, Tax Revenue Shortfall [Why&Next]

Flexible Fuel Tax Cut Set to End This Month
Experts Predict Possible Extension
"There Has Never Been a Prolonged Recession Like This"
Extension Expected to Be Difficult Despite Plans to End in Second Half
Uncertain Oil Prices, Exchange Rates, and Sluggish Domestic Demand
Will Tax Revenue Decline Again This Year After Last Year's Shortfall?

As the fuel tax reduction measure is set to end at the end of this month, attention is focused on whether the government will extend it further. Considering the sluggish domestic demand and exchange rates, there are forecasts that such a measure will be extended. The existing government plan is to gradually reduce the fuel tax cut in the first half of the year and end it in the second half, but due to fluctuations in international oil prices, changes are possible, making predictions difficult. In this case, tax revenue will decrease compared to the previously expected budget.

The appearance of a gas station in Seoul last November

According to the Ministry of Economy and Finance, the Korea Institute of Public Finance, and other government-funded research institutions and academia on the 4th, the flexible fuel tax rate reduction measure, which has been ongoing for two months since last month, will end at the end of this month, and the government is reviewing whether to extend the measure. The government is carefully examining domestic and international oil prices, inflation, economic conditions, exchange rates, as well as the impact on public finances. Based on related precedents, the government's final decision is likely to be announced around mid to late this month, although there are also claims that it could be earlier.

Inside and outside the government, there is a high expectation that the fuel tax reduction measure will be extended once more. This is because the domestic demand slump is prolonged, and negative factors such as emergency martial law situations and impeachment politics are dampening economic sentiment. Although international oil prices, which rose once last month, have recently decreased, the fact that exchange rates remain at a high level is also expected to have an impact. Previously, the government had maintained the fuel tax reduction measure for over three years since November 2021 during the COVID-19 outbreak. If extended again this time, it will be the 14th extension.

Professor Lee Jeong-hee of the Department of Economics at Chung-Ang University said, "The political situation is unstable, and various uncertainties are too great, making it difficult for the economy to recover for the time being," adding, "It will be difficult for the government to stop the fuel tax reduction measure." Given the high public sensitivity to fuel prices, he evaluated that "it would be burdensome for the government to immediately stop the fuel tax reduction measure." Professor Lee also pointed out the seriousness of the current situation, saying, "In the past, fuel tax reductions mostly ended in the short term, but there has never been a case of such a prolonged recession."

If this trend continues into the second half of the year, tax revenue related to fuel tax is expected to decrease compared to this year's budget. The government has set the revenue from transportation, energy, and environmental taxes, which make up the fuel tax on gasoline and diesel, at 15.1048 trillion won. This budget was based on a scenario of gradually reducing the fuel tax cut until the first half of the year and ending the reduction measure from the second half. However, if the economic growth rate is expected to be in the low 1% range this year and fluctuations in international oil prices and exchange rates are large, the government will have no choice but to continue the fuel tax reduction measure contrary to the plan.

In fact, the government also prepared the revenue budget last year assuming the fuel tax reduction measure would end, but continued it to reduce the uncertainty of fuel prices due to Middle East tensions and ease inflationary pressure. As a result, cumulative revenue from transportation, energy, and environmental taxes from January to November last year was 10.4 trillion won, falling short of last year's budget of 15.3 trillion won. Even including December revenue, a multi-trillion won tax revenue shortfall is inevitable. Moreover, the Ministry of Economy and Finance's revised estimate in September last year for transportation, energy, and environmental tax revenue was only 11.2 trillion won. Although not finalized, the difference from last year's budget (15.3 trillion won) represents the tax revenue shortfall, which is significantly larger than the 300 billion won shortfall in 2023.

Experts say that because fluctuations in international oil prices and exchange rates are large and unpredictable, and the share of fuel tax-related revenue is not large, continuing the fuel tax reduction measure is not an immediate problem. However, they agree that efforts to gradually reduce the extent of the fuel tax cut should continue to help fiscal soundness. There are also suggestions to review whether it is appropriate to continue the fuel tax reduction measure, which was introduced in exceptional circumstances when international oil prices exceeded $100 per barrel, at the current level of $60-70 per barrel. Some argue that in a situation of significant tax revenue shortfalls for two consecutive years, even small deficits need to be managed.

Oh Jong-hyun, head of the Tax Research Division at the Korea Institute of Public Finance, explained, "Last year, the fuel tax reduction effect was present, but demand reduction also likely had an impact," adding, "When the economy worsens, fuel consumption decreases, and when oil prices rise, people tend to use less." He added, "At 15 trillion won in overall public finances, it is not a small tax item, but compared to income tax, corporate tax, and value-added tax, it does not account for a large share," and said, "While the basic tax rate is desirable, the government can flexibly adjust it if necessary."

A representative from the Korea Development Institute (KDI) said, "The government has been continuing the fuel tax reduction while gradually reducing the extent of the cut," adding, "The government will consider the timing to reduce the cut going forward." He added, "It is not possible to continue as is, so the direction to reduce the cut is appropriate." Professor Lee Cheol-in of Seoul National University's Department of Economics said, "From a revenue perspective, the estimated decrease of around 4 trillion won in transportation, energy, and environmental taxes last year is a large amount," emphasizing, "It cannot be left unattended, and efforts are needed to reduce the tax revenue shortfall even if it means cutting the reduction."

This content was produced with the assistance of AI translation services.