SEOUL — The Organization for Economic Cooperation and Development (OECD) called on South Korea on Thursday to introduce tighter fiscal rules and maintain a restrictive policy, as its budget is projected to remain in deficit through next year, and rapid aging is expected to add long-term pressure.
According to Yonhap News Agency, "The budget is projected to remain in deficit in 2024 and 2025. South Korea needs to restrain spending through next year." The organization emphasized the need for the government to adopt proposed fiscal rules and conduct regular spending reviews to ensure long-term fiscal sustainability. In 2022, the government announced a plan to cap the fiscal deficit at 3 percent of gross domestic product (GDP), with provisions to lower the deficit to 2 percent if debt exceeds 60 percent of GDP, though the bill has yet to be passed.
The OECD noted that while public debt remains low in South Korea compared to other OECD peers, it is "set to increase rapidly going forward and exceed 150 percent of GDP by 2060" due to demographic changes increasing fiscal pressures from pensions, health care, and long-term care. In 2023, the country's total revenue fell by 77 trillion won (US$55.82 billion) year-on-year to 497 trillion won, with a marked decrease in tax collection attributed to poor corporate performances and a slump in the property market.
The OECD also pointed to the government's tax relief measures as a reason for the significant fall in tax revenue last year. Vincent Koen, head of the OECD's country studies division, suggested that in the long run, South Korea may need to find new revenue sources, such as increasing the value-added tax, which is currently set at 10 percent, below the OECD average. Koen also addressed the inheritance tax, stating that there is "no definite causal evidence" of it contributing to the Korea discount and that it serves to reduce intergenerational economic power persistence.
South Korea's Finance Minister Choi Sang-mok has indicated that reforming the inheritance tax is a priority, given the high rate and the need to reflect the latest market and economic conditions. In response to population decline, the OECD recommended measures to improve work-life balance and boost female employment. South Korea's total fertility rate hit a record low of 0.72 in 2023, far below the 2.1 births per woman needed to maintain a stable population without immigration. The population is expected to halve in 60 years, with those aged 65 and older projected to constitute 58 percent of the total by that time.
The OECD advised South Korea to tighten and enforce quality criteria for private childcare, improve the accessibility of public childcare, encourage workplace childcare, and extend formal childcare hours. Policy suggestions also include expanding parental leave coverage, increasing the parental leave ceiling, and financing parental leave benefits with public resources. Koen emphasized that a comprehensive package addressing work and family balance is necessary, with cash bonuses being just one part of it.
The OECD also stressed the need to break down labor market dualism, expand social insurance enrollment, and consider relaxing regulations on reconstruction and pre-sale price caps to boost the housing supply. It advised introducing a flexible wage system and raising the pension eligibility age to extend the retirement age. The current pensionable age in South Korea is 63, one of the lowest among OECD nations. The organization also called for reforming the support scheme for small- and mid-sized companies to boost productivity.