No. 1001: Fiscal Sustainability for the Republic of Korea: Long-Term Fiscal Headway under Demographic Pressure
Sang Yoon (Tim) Lee School of Economics and Finance, Queen Mary University of London
June 5, 2026
Abstract
The Republic of Korea enters the coming demographic transition from a position of relative fiscal strength. Public debt remains moderate compared with many advanced economies, fiscal institutions retain credibility, and the government still has policy space that many older welfare states no longer possess (International Monetary Fund, 2025). The challenge is that Korea is now entering one of the most compressed demographic transitions in history. The same forces that will raise pension, healthcare, and long-term care spending will also weaken the labor-income and contribution bases that have historically supported public finances (OECD, 2025a; De Biase et al., 2022).
The central argument of this report is that Korea needs fiscal headway: a credible medium-term framework that preserves policy capacity and smooths burdens across cohorts while deeper reforms address low fertility, housing pressure, labor-market dualism, produc-tivity slowdown, and the political economy of aging. Fiscal policy cannot by itself solve Korea’s demographic problem. But VAT reform, excise indexation, pension reform, Basic Pension retargeting, health-payment reform, and longer working lives can make adjustment earlier, smoother, and fairer. In a rapidly aging society, time and credibility are policy assets.
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