The government, which has been normalizing fuel tax for over three years, has decided to slow down the pace of normalization. As international oil prices began to rise again due to the deteriorating situation in the Middle East, including the Iran-Israel war, there are concerns about price burdens, and they intend to monitor the situation for now. Amid increasing fiscal demands such as the preparation of a supplementary budget for economic responses, there are worries that extending the tax cuts will worsen the tax revenue shortfall.
According to the Ministry of Economy and Finance, the fuel tax cut measures, which were introduced in November 2021, have been maintained for 3 years and 7 months due to the need to respond to the sharp rise in international oil prices and stabilize inflation. The government decided to maintain the current reduction rate for an additional two months, marking the 16th consecutive extension.
The reason the government has slowed the pace of fuel tax normalization is the expectation of increased volatility in international oil prices due to the situation in the Middle East. When news broke that Israel had conducted a preemptive strike against Iran, the price of Brent crude futures rose to $78.5 per barrel on the 13th. As of that day, it is recording around $75 per barrel. The price of Brent crude had maintained around $60 before the war last month.
If the situation escalates into a broader conflict, oil prices could soar even higher. The Middle East accounts for one-third of global crude oil production, and Iran is the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC).
JP Morgan noted, "In the worst-case scenario, oil prices could rise to $120 to $130 per barrel," adding, "The blockade of the Hormuz Strait could provoke retaliation from OPEC member states and disrupt oil supply chains across the Middle East." The Hormuz Strait is a strategic passage through which about 20% of global maritime oil supply travels. Approximately 70% of the oil entering Korea passes through this route.
The government expanded the fuel tax cut rate to 37% from July to the end of December 2022, then adjusted it to a reduction rate of 25% for gasoline and 37% for diesel and LPG butane from January 2023 to June 30 of last year. Since then, the gasoline reduction rate has gradually decreased from 20% to 15% to 10%, while the diesel and LPG butane reduction rates have decreased from 30% to 23% to 15%.
The last reduction rate was set in April. The government announced the 16th extension on the same day and decided to maintain the reduction rates at 10% for gasoline and 15% for diesel and LPG butane until the end of August.
A government official said, "While oil prices had stabilized and we had been gradually reducing the fuel tax cut, we had to reconsider the situation due to the surge in oil prices caused by the war," and added, "This time, we decided to keep it as it is."
The government had anticipated that 15.3 trillion won in transportation, energy, and environmental taxes would be collected based on the assumption of ending the fuel tax cut last year, but because the fuel tax cut measures have continued, actual tax revenue fell short by 3.9 trillion won.
This year, the government had also projected tax revenues of 15.1048 trillion won, but as the fuel tax cut measures continue, securing this revenue has become difficult again. Huh Jun-young, a professor of economics at Sogang University, said, "In a situation where the government has many expenses, and oil prices have recently hovered around the mid-$60 range, the fuel tax cut measures were nearing their end, but concerns over a tax revenue shortfall due to Middle Eastern variables are rising."