Lower fuel tax: boon or bane?
A gas station in Seoul shows its prices for gasoline and diesel per liter. Yonhap
By Park Hyong-ki
The government announced Wednesday that it will temporarily lower the tax on refined fuel products such as gasoline and diesel to help ease the financial burden on low- and middle-income earners, and small businesses.
Under the new measure, the government will cut fuel taxes by 15 percent from Nov. 6 for six months, which it expects will reduce gasoline prices by up to 123 won per liter and diesel prices by 87 won per liter.
However, politicians and market analysts have shown lukewarm responses regarding the government's move, with data showing such a move in the past did not work and did not benefit the income groups intended.
As long as international oil prices keep rising, the effects of lowering the fuel tax rate would be limited, some lawmakers of the National Assembly Finance Committee argue.
Korea reduced the tax by 10 percent from March to December 2008, but the average gasoline price here rose instead by 3 percent over that period, said Rep. Yoo Sung-yup of the Party for Democracy and Peace during a National Assembly audit of the finance ministry, Oct. 19.
The reason behind the price rise was global oil prices, which rose nearly 8 percent to $95.4 per barrel then.
“So, the government failed then,” Yoo said, adding it wasted 1.6 trillion won and asking what makes the incumbent administration absolutely sure its plan will work this time.
Rep. Yoo Seung-hee of the ruling Democratic Party of Korea (DPK) also said the fuel tax should be used in other areas that require immediate attention for the low and middle classes rather than for developing road infrastructure.
This is because the effects of the short-term tax reduction, as shown previously, would likely be limited in benefiting average households, she added, noting they would only be able to see a gas price decline of 6,000 won per month based on today's oil prices.
The fuel tax is the sum of transportation, energy, environment, mileage, regional and value-added taxes. Each one serves its own purpose, with the government collecting taxes from fuel consumption to develop and maintain roads and improve the environment.
Finance Minister Kim Dong-yeon said several factors have been accounted for before the government began considering the lower fuel tax rate, which could help spur sluggish consumption amid the weakening economy.
Brent crude is currently trading around $80 per barrel, and the number of vehicles stands at 23 million, which are some of the key factors the ministry considered, he noted, adding, “A lot of things have changed since 2008.”
Oil prices have been facing volatility on increased U.S. supply and geopolitical uncertainty in the Middle East. In September and early October, global analysts such as Bank of America Merrill Lynch and JPMorgan projected crude oil prices could reach as high as $100 by the end of 2018 and early 2019 as oil-producing countries such as Saudi Arabia have expressed reluctance to increase output.
The Bank of Korea (BOK) said should the government follow through with the reduction, it is expected to slow consumer prices by 0.2 percentage points a month on average.
Analysts also sided with the general view that the lower fuel tax would not add up to much for the economy.
“Given that changes in gasoline prices have little influence on demand, the short-term tax reduction is expected to have little effect especially for businesses,” said Hwang Sung-hyun, an analyst at Eugene Investment & Securities.