South Korea’s economy is projected to grow by just 1.8% in 2025, according to a government forecast released on Jan. 2. This reflects the ongoing effects of domestic stagnation and political turmoil, including impeachment proceedings. The growth rate is below the estimated 2% potential and represents a downgrade from the 2.2% growth prediction made in July.
To counter potential economic setbacks, the government has unveiled measures aimed at stabilizing the economy in the first half of the year. These include temporary tax cuts on new vehicle purchases, with the Individual Consumption Tax reduced from 5% to 3.5% for the first time in 18 months. Additionally, over 40% of the 85 trillion won ($64 billion) budget allocated for economic and welfare programs will be disbursed by the end of March. Consumers who increase their spending in the first half of the year will also qualify for a 20% income tax deduction.
Acting President Choi Sang-mok, who also serves as deputy prime minister and finance minister, presented the 2025 economic policy direction during a meeting of economic ministers on Jan. 2. Choi highlighted the government’s focus on domestic recovery, maintaining international credibility, navigating trade uncertainties, and enhancing industrial competitiveness.
Exports are projected to grow by just 1.5% in 2025, a significant decrease from the 8.2% growth forecast for 2024. This slowdown is largely attributed to increased competition in key sectors like semiconductors. The forecast also reflects concerns about potential protectionist trade policies under the incoming U.S. administration.
Choi suggested that additional fiscal measures, including a supplementary budget, could be considered if the situation worsens. “We will reassess the overall economic situation in the first quarter and prepare further measures if necessary,” he stated. A senior finance ministry official also noted that a supplementary budget could be considered in the second quarter if the economy does not show signs of recovery.
The revised growth forecast has raised concerns about the sustainability of South Korea’s economic fundamentals. Inflation is now expected to be 1.8%, below the Bank of Korea’s 2% target, and down from the 2.1% forecast six months ago. If this trend continues, it will mark the first time since 2020 that both growth and inflation fall below 2%.
As part of the government’s recovery efforts, the Individual Consumption Tax cut for new vehicles will take effect starting Jan. 3. Even consumers who signed purchase contracts in October 2024 will benefit if their vehicles are delivered after this date. The tax reduction, which was last implemented from July 2018 to June 2023, decreases the tax from 5% to 3.5%. For instance, a 40 million won car would see a reduction of 490,000 won in tax, from 1.64 million won to 1.15 million won. With additional reductions in related education and value-added taxes, total savings could reach up to 700,000 won, according to the Ministry of Economy and Finance.
The government also plans to allocate 40% of this year’s budget for economic and welfare programs by the end of March, aiming to accelerate the flow of fiscal resources into the market. For example, senior employment program payments, which began in February 2024, will start in January this year. Subsidies for electric and hydrogen vehicles, previously scheduled for the fourth week of February, will now begin in the third week of January. Additionally, buyers of electric vehicles in the first half of the year will benefit from increased government subsidies, which will rise from a 20% match of manufacturers’ discounts to as much as 40%.
Legislation aimed at easing the financial burden on consumers, which was delayed due to National Assembly disruptions at the end of 2024, will be revisited. Key measures include amending the Act on Restriction on Special Cases Concerning Taxation to allow a 20% income tax deduction for increased consumption in the first half of the year, a significant increase from last year’s 10%. The government will also extend the Temporary Tax Credit for Investment, which offers tax incentives to small and medium-sized enterprises that increase their investments beyond the previous three-year average. The extension will last until the end of 2025. However, large corporations will not receive an extension, citing improved earnings over the past two years.
Other measures include the distribution of 1 million discount coupons for accommodations outside the Seoul metropolitan area. These will be valid for the next year, offering up to 30,000 won off the cost of stays. During the Lunar New Year holiday, discounts on Onnuri Gift Certificates used in traditional markets and small shops will rise from 10% to 15% for mobile and card versions. Additionally, the government plans to revise tax laws to allow “weekend couples” (spouses working in different cities) to claim separate monthly rent tax credits.
Critics, however, argue that these measures are limited in scope and may not address the broader economic challenges South Korea faces. Political instability is seen as a major hurdle, with both President Yoon Suk-yeol and Prime Minister Han Duck-soo facing impeachment proceedings.
Woo Seok-jin, an economics professor at Myongji University, warned that ongoing political uncertainty could undermine the government’s efforts. “Policies aimed at short-term stabilization could be abandoned within six months due to political instability,” he said. “A detailed understanding of public needs and bipartisan cooperation will be essential.”
