South Korea Implements Major Economic Initiatives Amid Slowed Growth Prospects for 2025
As economic growth projections for South Korea dip, the government has unveiled a series of substantial measures designed to bolster the economy in 2025. According to a forecast released by the government on January 2, the nation’s economy is expected to expand by a modest 1.8% this coming year. This figure is notably below the estimated potential growth rate of 2% and represents a decline from an earlier prediction of 2.2% made in July.
The subdued growth rate is attributed to ongoing domestic stagnation and political challenges, including the looming threat of impeachment. In response to these potential economic hurdles, the government has announced several initiatives aimed at stabilizing the financial landscape, particularly in the first half of the year. Among these initiatives are temporary tax cuts on new vehicle purchases; for the first time in 18 months, the Individual Consumption Tax will be lowered from 5% to 3.5%. Furthermore, over 40% of the 85 trillion won ($64 billion) budget earmarked for economic and welfare programs is set to be released by the end of March. Consumers who boost their spending during the first half of 2025 will also qualify for a 20% income tax deduction.
Acting President Choi Sang-mok, who also serves as the Deputy Prime Minister and Finance Minister, outlined the government’s economic policy focus during a meeting of economic ministers. He emphasized the need for a domestic recovery, the preservation of international credibility, the navigation of trade uncertainties, and the enhancement of industrial competitiveness. The export landscape also paints a concerning picture, with projections suggesting a mere 1.5% growth for 2025—sharply down from the anticipated 8.2% for 2024. This adjustment is primarily the result of intensified competition in critical sectors such as semiconductors, compounded by fears of potential protectionist policies from the incoming U.S. administration.
Choi indicated that should conditions deteriorate, the government might contemplate supplementary fiscal measures. “We will reassess the overall economic situation in the first quarter and prepare further actions if necessary,” he stated. A senior finance ministry official echoed these sentiments, highlighting that a supplementary budget may be pursued by the second quarter if signs of economic recovery remain elusive.
The revised growth forecast raises alarms regarding the sustainability of South Korea’s economic fundamentals. Inflation rates are now projected at 1.8%, falling below the Bank of Korea’s target of 2% and slightly down from the 2.1% estimate made six months prior. If these trends persist, it would mark the first instance since 2020 in which both growth and inflation dip below the 2% threshold.
As part of its recovery initiatives, the Individual Consumption Tax reduction for new vehicle purchases is effective from January 3. This benefits not only those who make purchases post-announcement but also consumers who signed contracts as early as October 2024, contingent upon delivery after the effective date. The tax relief, which previously spanned from July 2018 to June 2023, decreases the tax rate on a 40 million won vehicle from approximately 1.64 million won to 1.15 million won, yielding a tax reduction of 490,000 won. Total savings, factoring in reductions in related education and value-added taxes, could reach up to 700,000 won, according to the Ministry of Economy and Finance.
The government aims to expedite fiscal resource allocation by distributing 40% of this year’s budget for economic and welfare programs by the end of March. For instance, payments for senior employment programs will initiate in January rather than February as initially planned, and subsidies for electric and hydrogen vehicles are set to commence earlier than expected. Additionally, the government intends to revisit legislation aimed at alleviating consumer financial constraints, which was postponed due to disruptions in the National Assembly at the end of 2024. Key legislative changes include amending the Act on Restriction on Special Cases Concerning Taxation to implement a 20% income tax deduction for increased consumption during the first half of 2025—up significantly from last year’s 10%.
The government will also extend Temporary Tax Credits for Investment initiatives for small and medium-sized enterprises through the end of 2025, while large corporations will not receive similar extensions due to their improved earnings in recent years. Further government initiatives will see the distribution of one million discount coupons for accommodations outside the Seoul metropolitan area, offering savings of up to 30,000 won. During the Lunar New Year holiday, discounts on Onnuri Gift Certificates used in traditional markets will also increase from 10% to 15% for mobile and card versions. Moreover, tax laws are set to be revised to enable “weekend couples,” those living apart due to work obligations, to claim separate monthly rent tax credits.
Despite these proactive measures, critics argue that the initiatives may be insufficient to tackle the more considerable economic challenges confronting South Korea. Political instability poses a significant threat to recovery efforts, with both President Yoon Suk-yeol and Prime Minister Han Duck-soo facing impeachment inquiries.
