South Korea extends fuel tax cut ahead of crucial parliamentary elections in April

South Korea will extend tax cuts on auto fuels by another two months through the end of February in an effort to curb inflation amid lingering global geopolitical risks despite recent declines in international crude oil prices, Economy and Finance Minister Choo Kyung-ho said Dec. 12.

South Korea "is still facing multiple unstable factors, such as the Middle East circumstances and the oil supply situation, though global oil prices have fallen recently," Choo told a group of reporters.

Oil prices could always turn higher abruptly, Choo said, noting that geopolitical and global economic uncertainties are the main reasons for the tax cut extension.

The extension comes ahead of the crucial parliamentary elections slated for April 10 next year, which is considered as a mid-term judgment for unpopular President Yoon Seok-yeol who took office in May last year. Yoon's approval rating was as low as 31% in recent media polls.

It is highly possible for the Yoon government to further extend the oil tax cuts through the end of April in a desperate bid to woo voters' sentiment amid concerns about the country's economic slowdown, according to refinery sources and industry analysts.

"The South Korean economy has shown signs of a recovery in the second half of this year, and the fourth quarter is expected to post a 2% expansion, which will bring this year's growth to 1.4%," Choo said.

Earlier on Oct. 16, the Minister of Economy and Finance had decided to extend the tax cut on auto fuels by two months through the end of December, citing concerns about crude oil price hikes by the Israel-Hamas conflict and the protracted Russia-Ukraine war.

The government has provided tax cuts for auto fuels -- diesel, gasoline and butane -- since November 2021 to help cope with upward pressure on inflation, sparked by surging pump prices.

On Jan. 1 this year, the government restored tax reduction for gasoline to 25% from a legal cap of 37% cut, while maintaining tax cuts for diesel and butane at 37%.

Before the tax cut, taxes accounted for about 50% of the retail gasoline price and 40% of the diesel price, and these have prompted consumers to ask for tax reductions.

With the cut, the tax on retail gasoline price is currently Won 615/liter (47 cents/liter), down from Won 820/l (62 cents/liter) before the tax reduction, while the tax on diesel price is Won369/liter currently, compared with Won 581/liter before the tax cut, according to the MOEF.

Taxes currently account for 37.8% of gasoline pump prices and 23.6% of diesel pump prices. Domestic oil taxes are included in the transport tax, driving tax, consumption tax, education tax and value-added tax.

Retail fuel prices, which had long been on the rise, started to decline since early October. Pump prices of gasoline averaged Won 1,627/liter ($1.24/liter) in the first week of December, compared with Won 1,750/liter ($1.33/liter) three months earlier, in line with lower international crude prices, according to state-run Korea National Oil Corp.

Pump prices of diesel also dipped 4.7% to average Won 1,564/l in the first week of December, compared with Won 1,641/l three months earlier.