OECD calls for South Korea to adopt tighter fiscal rules amid deficit, rapid aging

Seoul, July 11 (IANS)The Organisation 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, reported Yonhap news agency.

"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 per cent of gross domestic product (GDP). If debt exceeds 60 per cent of GDP, the government shall lower the deficit to 2 per cent, 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 per cent of GDP by 2060" as demographic changes are to increase fiscal pressures from pensions, health care and longer-term care, the OECD said.

In 2023, the country's total revenue fell 77 trillion won ($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.

Responding to population decline, the OECD recommended measures to improve work-life balance and to boost female employment.

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.

"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 organisation 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 OECD also stressed the need to break down labour 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 organisation 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.