The government took strong measures to counter the headwinds of waning global growth and mounting uncertainty. A supplementary budget of 0.3% of GDP was voted in August 2019 and fiscal stimulus of about 1.2% of GDP is planned for 2020. This is welcome, given the government’s sound budget position, low debt level and the need to expand social welfare. Caution is nevertheless warranted to avoid unfunded spending becoming permanent, especially as rapid population ageing and rising demand for social services will push up public spending over the next decades. Reinforcing the fiscal framework would ensure that active fiscal policy remains consistent with long‑term fiscal sustainability.
The Bank of Korea cut its policy rate by 25 basis points twice, in July and October 2019, to 1.25% and is expected to lower it further next year, as inflation will remain below the 2% target and economic activity will stay lacklustre. The wide range of macroprudential measures put in place in recent years should help contain increases in high household debt, and could be tightened further if necessary.
To foster inclusive long‑term growth, Korea needs to implement structural reforms. As the population is ageing very rapidly, labour resources should be better mobilised and productivity, which is only about half of that in the top half of OECD countries, needs to rise. Easing labour market regulations and investing further in skills, especially digital, would help lift female and youth employment, enhance the quality of older workers’ jobs, and reduce labour market duality. Regulatory reform to increase competition and greater policy focus on innovation and business dynamism in small and medium‑sized enterprises would raise productivity, especially in services, where it is lagging.
