A majority of adults in South Korea are not adequately prepared for the eventual need for elderly care. (Image courtesy of Kobiz Media)
SEOUL, Jul. 11 (Korea Bizwire) –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 would add longer-term pressure.
“The budget is projected to remain in deficit in 2024 and 2025. South Korea needs to restrain spending through next year,” the OECD said in its biennial economic report on South Korea released in the day.
“The government needs to adopt the proposed fiscal rules and continue to carry out regular spending reviews to ensure long-term fiscal sustainability,” it added.
In 2022, the government announced a plan to introduce the fiscal rule that calls for capping the fiscal deficit at 3 percent of gross domestic product (GDP). If debt exceeds 60 percent of GDP, the government shall lower the deficit to 2 percent, though the bill has yet to be passed.
Public debt remains low in South Korea, compared with other OECD peers, but it is “set to increase rapidly going forward and exceed 150 percent of GDP by 2060″ as demographic changes are to increase fiscal pressures from pensions, health care and longer-term care, the OECD said.
This photo, provided by South Korea’s finance ministry, shows Vincent Koen, head of the Organization for Economic Cooperation and Development’s country studies division, speaking during a press briefing in the central city of Sejong on July 11, 2024. (Yonhap)
In 2023, the country’s total revenue fell 77 trillion won (US$55.82 billion) on-year to 497 trillion won, as tax collection went down markedly due to poor corporate performances and the property market slump reducing transaction taxes.
The OECD also pointed to the government’s tax relief as a reason for the marked fall in tax revenue last year.
“In a long-run, there is a need to find a new source of revenue. Of some potential sources, one is the value added tax that is set at 10 percent. It is barely above half the OECD average. This will probably have to be increased,” Vincent Koen, head of the OECD’s country studies division, told a press briefing.
There is also “no definite causal evidence” of the inheritance tax being a cause of the Korea discount, and taxing inheritance is “in general an efficient form of taxation, and it serves the important purpose of reducing intergenerational persistence of economic power,” according to the organization.
South Korea’s Finance Minister Choi Sang-mok has said reforming inheritance tax should be a priority, as the rate is quite high and the scheme needs to reflect latest market and economic situations.
esponding to population decline, the OECD recommended measures to improve work-life balance and to boost female employment.
A new report has projected that South Korea’s total population, which stood at just over 51 million last year, could plummet to around 39 million by 2065 due to persistently low birth rates in the country. (Image courtesy of Yonhap)
The total fertility rate, which means the average number of expected births from a woman in her lifetime, also hit a record yearly low of 0.72 in 2023, which came 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, and the number of people aged 65 and older is forecast to take up 58 percent of the total by that time, according to the organization.
“South Korea is advised to tighten and enforce quality criteria for private childcare, improve the accessibility of public childcare, encourage workplace childcare, and extend formal childcare hours to accommodate working parents’ needs,” the organization said.
Policy suggestions also include expanding parental leave coverage to the entire workplace, increasing the parental leave ceiling for all leave takers, and financing parental leave benefits and other associated charges with public resources.
“The cost of not being able to combine work and family in Korea is so high that compensating for this with a cash bonus lead to be very effective,” Koen said.
“But it’s not the silver bullet. You need a completely different more fundamental package where cash bonuses can be part of it,” he added.
The figures assume that the current rates of birth, death and population change will continue, the statistics agency explained. (image: KobizMedia/ Korea Bizwire)
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 as part of efforts to boost the housing supply.
It advised South Korea to introduce a flexible wage system and raise the pension eligibility age so as to extend the retirement age. The current pensionable age in South Korea came to 63, which is one of the lowest among the OECD nations.
The organization also called on the Seoul government to push for reform of its support scheme for small- and mid-sized companies so as to boost their productivity.
(Yonhap)
