Medium and Longer Term Fiscal Issue Analysis: Population Crisis Responses

Published on Nov., 17, 2023
Published by Economic Industrial Program Evaluation Division

   As future population estimates indicate a worsening trend in low fertility, the government has formed a population policy task force and devised three response measures. Furthermore, it recently announced the "Population Structural Changes and Response Plans (2022)" and implemented various measures to address the population crisis. Despite a continuous increase in the budget allocated to combat low fertility, rising from 2.1 trillion won in 2006 to 48.2 trillion won in 2023, the total fertility rate in the second quarter of 2023 recorded an all-time low of 0.70, indicating that fertility goals are far from being achieved.
   This report provides a forecast of the economic and fiscal impact stemming from mid- to long-term changes in population structure. Additionally, by conducting an analysis and evaluation of government policies in response to the population crisis, it presents effective improvement measures. Initially, the report examines the anticipated shifts in Korea's population structure, assessing their potential influence on economic growth and finances. Furthermore, it explores various government policies designed to address population changes, offering overall achievements and improvement initiatives categorized into responses for low fertility, immigration policies, promotion of cutting-edge technology, and talent training, and the key analysis outcomes are summarized as follows:
   Firstly, the report projects that under the current total fertility rate scenario (NABO long-term low fertility scenario) in Korea, the total population is projected to decline from 51.84 million in 2020 to 49.16 million in 2040. This decline is anticipated to have an adverse impact on various social sectors, including education, national defense, labor, tax revenue, as well as the nation’s economic growth and fiscal stability. Notably, the long-term economic growth rate of Korea is expected to continue its descent, reaching 0% growth from the 2040s onward, and the long-term fiscal outlook paints a concerning picture as well, predicting a substantial increase in the national debt-to-GDP ratio from 49.2% in 2022 to 100.7% in 2040 and further escalating to 192.6% in 2070. Additionally, total revenues are projected to increase at an average annual rate of 0.8% until 2070, while total expenditures are expected to rise at an average of 1.4% per year, exacerbating the fiscal balance deficit.
   Secondly, despite the persistent implementation of policies and an expanded budget (from 2.1 trillion won in 2006 to 48.2 trillion won in 2023), the total fertility rate remains low (at 0.70 as of the second quarter of 2023). Therefore, there is a pressing need to rejuvenate the childcare leave system, enhance support for child education and after-school care, alleviate the financial burden of private education costs, and broaden tax support measures.
   Thirdly, while acknowledging the necessity of pursuing an expansive immigration policy to boost the economically active population, several critical measures are deemed essential. These include: 1) The establishment of a comprehensive control tower capable of overseeing policies regarding immigration, foreign workforce, multicultural families, and social integration, 2) Relaxation of visa requirements for the settlement of skilled workforce, 3) Improvement of the Employment Permit System (allowing for flexibility in changing workplaces and family invitations), 4) Strengthening the influx and management of international students as a source of future talent, and 5) Enhancing public acceptance of immigration policies.
   Fourthly, recognizing the pressing need to enhance cutting-edge technology to boost labor productivity amid the decline in growth potential resulting from a shrinking population, there is a need to cultivate high-tech fields such as AI, space development, and robotics, which requires a private-led collaborative system between the private and public sectors. Additionally, the establishment of urban clusters to attract innovative entities is also necessary.
   Fifthly, Korea's labor productivity lags behind the OECD average, with its growth rate slowing, underscoring the imperative to enhance human capital productivity. To effectively cultivate talent, it is essential to: 1) Enact laws that establish the foundation for talent development, 2) Systematically promote related fiscal programs by establishing a control tower, 3) Introduce a talented foreign workforce, 4) Strengthen vocational education and training. These measures are vital for improving Korea's low National Talent Competitiveness (currently ranking 23rd-25th among OECD countries in the Global Talent Competitiveness Index).