Korea’s new semiconductor-fuelled age of plenty provides a window of opportunity to strengthen fiscal institutions and share fiscal burdens fairly between generations.
by Jon Pareliussen, OECD Economics Department
Korea is booming despite the fallout from the evolving conflict in the Middle East, as demand for advanced semiconductors is skyrocketing. Although this demand shock can potentially go on for a long time, it is temporary by nature, as prices and profits will eventually normalise when investment catches up and new production capacity comes online. When this happens, currently surging tax revenues will also fall back to normal levels. The fiscal and labour market consequences of Korea’s rapid ageing are just starting, but will intensify. The OECD Economic Survey of Korea 2026 illustrates the fiscal challenge of ageing and proposes directions to achieve savings and raise revenue. Booming tax revenues linked to the semiconductor super-cycle could be used to underpin an intergenerational contract aligning current tax and spending decisions with long-term fiscal sustainability.
Semiconductor exports drove GDP growth at an annual rate of 7.5% in the first quarter of 2026. Companies producing advanced chips are at the core of a historic stock market rally and workers in each of the two dominant producers secured annual bonuses totalling roughly 1% of Korea’s GDP. The semiconductor super-cycle also raises tax revenues to new highs. So far these revenues have supported increasing spending in annual and supplementary budgets, while negative shocks since the pandemic have largely led to fiscal deficits. This means that when averaged over good times and bad times, Korea is running structural fiscal deficits. With one of the lowest debt-to-GDP ratios in the OECD, Korea is under no immediate pressure to balance the books, but sustained fiscal deficits will add to the already heavy fiscal pressures related to ageing that current young and future generations will need to address.
In a stylised scenario where spending pressures go completely unabated, fiscal pressures from ageing would add ten percentage points to annual public borrowing by 2060, by which time public debt would be 220% of GDP. Servicing this debt would require that a shrinking labour force consisting of today’s young and currently unborn generations work harder, pay more taxes and receive less in return. This would be unfair and most likely untenable on current trends.
Few economic shocks are so profound, yet so anticipated, as Korea’s ageing. Fertility has dropped from six children per woman in 1960 to well below one every year since 2018, while life expectancy has risen steadily and is now over two years above the OECD average. As a result, the labour force will fall as a share of the total population within the next few years, for the first time in living memory. At the same time, fiscal pressures from pensions, health and long-term care will mount. The OECD Economic Survey of Korea 2026 shows that by starting to address the issues systematically today, a combination of spending prioritisation, further pension reform, an increase in tax revenue and structural reforms to boost employment and productivity can stabilise public debt while growth performance is upheld and the tax burden remains reasonable (Figure 1).
Strengthened fiscal institutions can help successive governments systematically make the fiscal choices today that are compatible with long-term sustainable public finances and a fair burden-sharing between generations. A durable, long-term fiscal framework needs to be founded on expert analyses and anchored across the political spectrum and with key stakeholders. This broad coalition should agree on an intergenerationally fair fiscal trajectory and a mechanism to align annual budgeting with medium term fiscal objectives. An independent fiscal institution with a clear mandate to assess compliance could help build trust and ensure transparency.
Such a framework needs to provide clear guidance without being overly restrictive. It should allow for countercyclical fiscal policy and provide flexibility for severe crises, for example, by defining compliance over the cyclically-adjusted annual budget balance and building in an escape clause for severe crises. A structured process to adapt the fiscal framework could be envisaged to regularly adjust it to changing circumstances, as is done, for example, in Sweden over an eight-year cycle.
It is potentially easier to agree on sharing of burdens in an age of plenty. Korea’s new intergenerational fiscal contract should therefore be built today while tax revenue is soaring. The framework can then prove its worth by putting the public finances on a firm footing by the time fiscal constraints really start to bind when demographic headwinds intensify.
Reference
OECD (2026), OECD Economic Surveys: Korea 2026, OECD Publishing, Paris, https://doi.org/10.1787/6b87f585-en.