OECD Economic Surveys: Korea 2026

Executive summary

Key messages

Korea has shown stellar improvements in incomes and well-being since OECD accession in 1996. In recent years, the economy has demonstrated considerable resilience to external shocks and democratic institutions withstood domestic political turmoil. Despite these considerable strengths, the conflict in the Middle East poses a risk to the economic outlook, while long-standing imbalances are becoming more challenging in the context of low birth rates and rapid population ageing, calling for urgent reforms to tackle them:

• Fiscal institutions need to be strengthened further to put public finances on a sustainable path. Reprioritising spending, reforming the tax system and improving the functioning of labour and product markets can support growth and reduce the cost of the necessary fiscal adjustments.

• There is scope to make the tax system more growth-friendly by rebalancing the tax mix towards indirect taxes, recurrent property taxes and corrective taxes such as those on greenhouse gas emissions, reducing tax expenditures and broadening the corporate and personal income tax bases.

• Skills like critical thinking and learning-to-learn need to be nurtured by reprioritising resources towards more instruction time in primary education, improving the quality of universities and reforming the incentive structure with less focus on high-stakes exams to enter universities, the civil service and licensed occupations.

• Korea is caught in a self-reinforcing cycle of economic concentration, regional decline and low fertility. Breaking this cycle requires rebalancing economic opportunities by providing stronger regional services, more effective place-based policies, and reforms to spatial planning and housing policy frameworks.

After decades of strong economic performance, policy challenges remain

Following Korea’s accession to the OECD in 1996, GDP per capita increased from three-quarters of the OECD average to the average, and huge strides were made in work-life balance, life expectancy and educational attainment. Despite all these achievements, rapid ageing following decades of very low fertility casts a shadow on the future and calls for a range of structural reforms.

Life expectancies for both women and men have moved from below the OECD average in 1996 to well above average in 2024. The work-life balance has also improved, with annual work hours falling rapidly from 43% above the OECD average in 1996 to only 7% above in 2024. Exports have almost doubled from 24% of GDP to 44%. Manufacturing has maintained a prominent role but has shifted towards high-tech, high-value-added production. Entertainment, cosmetics and food, which currently represent a small share of exports, are rapidly growing.

Openness to trade has been a central part of Korea’s growth story, but new trade barriers and an increasingly fraught relationship between its biggest trading partners, the United States and China, create challenges. The increasing dependence on semiconductor exports boosts growth and tax revenues but may also increase exposure to external shocks and cyclical volatility.

Over the past three decades, population ageing has emerged as a defining challenge. Due to extremely low birth rates and increasing life expectancy, the age structure of the population has inverted, and the labour force is set to contract in a few years after decades of expansion.

Fiscal pressures from ageing are increasingly putting public finances at risk. These pressures add to past trends. Public expenditures as a share of GDP have risen by almost 20 percentage points, while gross public debt has gone from below 10% of GDP to almost 50% since 1996 (Figure 1).

Fiscal consolidation needs to start as the economy returns to normal. On the expenditure side, further pension reform is necessary. The government should intensify ongoing efforts to reallocate spending to improve efficiency and reduce distortive or poorly targeted support, while also addressing unmet spending needs. Reducing tax expenditures and increasing revenue from indirect and corrective taxes can contribute to a simpler, more growth-friendly tax system.

Figure 1. Rapid ageing puts public finances under pressure

Note: Debt-to-GDP scenarios are based on OECD’s long-term projection model. “Current policies” assumes that additional fiscal pressure due to ageing is debt-financed. In the “Prudent fiscal framework” scenario, all of the ageing-related spending needs (Figure 1.5 Panel A) are addressed through additional revenues and expenditure measures. The “Prudent fiscal framework and structural reforms” scenario adds a series of policy reform packages that boost productivity, employment and alleviate demographic pressures.

Source: OECD Economic Outlook 119; OECD Long-Term Database, 2025; OECD calculations.

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Strengthened fiscal institutions could help secure long-term sustainability and improve spending prioritisation. Reforms should be based on a broad political consensus and include fiscal objectives consistent with long-term sustainability. An independent fiscal institution mandated to monitor compliance could help build trust and ensure transparency.

A dual labour market with substantial differences in pay, job security and social protection leads to excessive competition among youth to enter prestigious universities and thereby secure good jobs. Substantial public and private resources are invested in schooling and tutoring. There are signs that youth are not learning the right things, as their skills depreciate rapidly with age and many struggle to find employment. The dual labour market and early retirements driven by seniority-based wages reduce incentives to invest in lifelong learning.

The race to enter top universities and the shortage of quality jobs are among the main reasons why young adults keep moving from Korea’s regions towards the capital area. Even so, emerging evidence suggests that moving to the capital is no longer the path to prosperity it once was. Mobility benefits of migration have come to depend strongly on parental income and wealth.

In this respect, policies intended to address regional imbalances may have unintended side effects. For example, curbing university entry creates scarcity, contributing to the lure of “in-Seoul” universities. Support to businesses and regions must be well-designed to facilitate restructuring and avoid locking resources into declining activities.

The energy price shock is clouding the economic outlook

Korea weathered a string of external shocks compounded by the martial law declaration in late 2024 and was on a path to recovery when the conflict in the Middle East broke out. Semiconductor exports have been driving growth, while construction and other manufacturing sectors are lagging behind.

The recovery from a string of external and internal shocks was gaining momentum when the conflict in the Middle East broke out. The recovery from the post-Covid cost-of-living crisis had just started to take hold when former President Yoon’s declaration of emergency martial law in December 2024 sapped consumer- and business confidence. Yoon’s removal from office and new elections in June 2025 were central in restoring confidence. Consumption coupons issued by the new administration kick-started private consumption but contributed to fiscal deficits.

Semiconductor exports have been an important growth driver, with the growth contribution of exports and investments accelerating in early 2026. It also generates volatility in output and tax revenues and strategic vulnerabilities.

Monetary policy should largely look through temporary inflation pressures from energy price shock, but may need to tighten somewhat to keep long-term inflation expectations anchored. Inflationary pressures from domestic demand remain subdued, as GDP remains well below its estimated potential. The labour market has softened, notably for young adults, while public works programmes are boosting employment of elderly workers. Housing prices in the Seoul area have been rebounding from a post-pandemic correction, but have been constrained by strict mortgage lending curbs.

GDP growth is set to strengthen to 2.6% in 2026 and 1.9% in 2027, driven by consumption, fiscal support and continued export strength linked to the semiconductor cycle. Private investments will contract in the short term in response to geopolitical uncertainty (Table 1). Risks related to the conflict in the Middle East are skewed to the downside.

Table 1. Growth is recovering

Annual growth rates, %, unless specified

	2024	2025	2026	2027
Gross domestic product (GDP)	2.0	1.0	2.6	1.9
Private consumption	1.1	1.3	2.2	2.1
Gross fixed capital formation	-0.8	-3.3	2.1	2.2
Exports	6.8	4.2	6.0	1.9
Imports	2.5	3.9	4.4	2.1
Unemployment rate (%)	2.8	2.8	2.8	2.7
Headline CPI inflation	2.3	2.1	2.6	2.2
Current account balance (% of GDP)	5.3	6.6	12.3	9.9
General government fiscal balance (% of GDP)	-1.5	-2.5	-2.1	-2.1

Source: OECD Economic Outlook 119.

A comprehensive tax reform could boost growth and revenues

There is scope to raise revenue and make the tax system more growth-friendly by phasing down tax expenditures, rebalancing the tax mix away from transaction-based property taxation toward more recurrent property taxes and making more use of indirect taxes and corrective taxes such as those on tobacco, alcohol and greenhouse gas emissions.

Korea faces tax policy challenges, including the need to secure additional tax revenue while supporting economic growth. Rapidly increasing ageing-related spending pressures require new sources of government revenue. At the same time, Korea must design its tax system to better support the economy in a low-growth environment.

The country’s tax revenue structure is characterised by a relatively low share of indirect and corrective taxes, while tax expenditures reduce revenues from direct taxes (Figure 2). Indirect taxes are generally less distortive than corporate and personal income taxes and should be prioritised to meet rising revenue needs going forward. Korea’s value-added tax rate is about half the OECD average. Taxes on tobacco and alcohol are relatively low and could be better aligned to limit negative externalities. There is also scope to raise additional revenue through environmental taxes and by auctioning a larger share of allowances under Korea's Emissions Trading System.

The corporate income tax system includes four tax brackets in addition to various tax expenditures amounting to 13.1% of potential corporate income tax revenue. Broadening the base and moving towards uniform taxation of corporate income regardless of company size would reduce distortions and incentivise businesses to succeed and grow.

More than one-third of Korean wage earners do not pay any personal income tax. The personal income tax features high progressivity for high earners, while those earning around the median income pay little tax due to the bracket structure and tax expenditures amounting to 35.3% of potential personal income tax revenue. Reforming tax exemptions and the bracket structure could make the tax simpler, more efficient and raise additional tax revenue.

Korea’s property tax revenue structure relies more heavily on transaction taxes and less on the more efficient recurrent taxes than the OECD average. A revenue-neutral shift, once current housing market tensions have abated, towards recurrent taxes and tenure neutrality would support residential mobility, improve labour market efficiency and mitigate housing market frictions.

Figure 2. Reducing tax expenditures and raising indirect taxes can boost revenue

As a share of GDP, 2024

Source: OECD, Revenue Statistics (database).

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Life-long learning needs a boost

Human capital is a key driver of productivity and gains in educational attainment have contributed to Korea's rapid growth over the past half-century. However, adult skills are below the OECD average and decline rapidly with age compared to OECD peers. There are signs that schools fail to build the foundation to continue learning as adults, while students prioritise maximising their scores in the university entry exam. A low share of adults participates in adult training or regularly learns by doing, even though such activities are associated with markedly higher skills.

Intensive tutoring improves students’ reading, science and mathematics skills, but these investments remain geared toward the university entry exam and do not develop sufficient skills in critical thinking and self-directed learning. Reducing the reliance on high-stakes exams in the education system and to enter the civil service and regulated professions would boost growth and tilt the current strong focus on book learning towards work practice and learning-by-doing.

While 70% of young adults have completed tertiary education, young, educated adults struggle to enter employment and the earnings premium of a degree has fallen (Figure 3). Weakening private returns to education are related to both the oversupply of degrees, the subject studied and quality issues in tertiary education. Further rebalancing education funding would allow investing in more instruction time and after-school care while reprioritising public funding towards universities.

In the labour market, those who participate in adult training or regularly learn by doing have markedly higher skills, but the shares of adults engaging in such activities are low. Reforming the dual labour market by facilitating mobility from irregular to regular employment and strengthening the social safety net could help irregular workers climb the ladder to more productive matches. Limiting job separations due to motherhood and the practice of “honorary” retirements at the average age of around 50 could lengthen productive matches and incentivise investments in skills.

Coordinating life-long learning better at both the regional and sectoral levels could help realise the social benefits of adult skills. Company-level collective bargaining reduces the scope for social partners to internalise positive spillovers from investments in skills. There is scope to improve publicly funded adult education and training at the local and regional levels, improving access and patchy oversight.

Figure 3. The tertiary education earnings premium is falling

Note: OLS regressions based on PIAAC microdata, controlling for individual characteristics and educational backgrounds. Panel B: Log earnings premiums of a tertiary degree relatively to an upper secondary degree, PIAAC cycle 2 (2023) minus PIAAC cycle 1 (2012 for most countries). Source: Pareliussen, J. (2026), “Documenting oversupply of degrees and diminishing returns to education in Korea with the OECD Survey of Adult Skills”, OECD Economics Department Working Papers (forthcoming).

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Regional policy could play a bigger role in helping lagging regions catch up

Economic opportunity, high-quality services and well-paid jobs have been increasingly concentrated in the Seoul Metropolitan Area (SMA). Many non-metropolitan regions face population loss, labour shortages and declining fiscal capacity. More balanced regional development requires stronger framework conditions in lagging regions, more effective place-based policies and an overhaul of spatial planning and housing policies.

Framework conditions currently reinforce spatial divergence rather than enabling regions to adapt to demographic decline. Uneven access to education, childcare, healthcare and transport remains a key driver of migration towards the SMA (Figure 4). Regulatory and procurement frameworks do not sufficiently enable local experimentation, digital innovation and AI-enabled service delivery, particularly in shrinking regions with limited administrative capacity.

Local governments face a mismatch between extensive spending responsibilities and limited fiscal autonomy, with low taxing power and heavy reliance on earmarked transfers. Fragmented intergovernmental coordination and exposure of transfers to partisan dynamics further weaken fiscal equalisation, reducing its capacity to stabilise service delivery and support adaptation to demographic decline.

Meanwhile, the strong concentration of prestige universities and economic opportunity in the Seoul Metropolitan Area channels talent away from regions, while regional labour market needs are only weakly reflected in secondary, vocational and higher education pathways.

Place-based policies have expanded in scope but remain fragmented and insufficiently anchored in functional regional economies. Past initiatives dispersed resources across projects and territories, limiting scale effects and long-term impact. Free Economic Zones have expanded infrastructure but generated limited sustainable spillovers. Regulation-Free Special Zones can enhance the attractiveness of non-metropolitan regions for innovative firms, but require effective governance and clear strategies for the diffusion of successful regulatory innovations. Crisis response zones provide short-term stabilisation but risk locking regions into declining activities without credible restructuring pathways. Consolidating instruments around clearly defined regional hubs that anchor labour markets, service provision and spillovers to surrounding areas could yield better results. Clear objectives, performance metrics and exit criteria are needed to ensure that place-based support lives up to its promises.

Spatial planning and housing policies have not sufficiently adjusted to demographic realities, limiting the adaptive capacity of regions. Highly centralised land-use governance constrains redevelopment and densification in high-demand metropolitan areas while limiting adaptive reuse and regeneration in shrinking regions. Administrative boundaries often fail to reflect functional economic areas, complicating coordination across municipalities and increasing infrastructure and service delivery costs. Land value capture tools exist but are underused in some remote areas due to limited local autonomy, weak institutional capacity and misaligned fiscal incentives. In metropolitan areas, supply constraints and long commutes undermine affordability and family formation. Public rental housing could be part of the solution, but suffers from relatively higher vacancy rates in some non-metropolitan areas compared to the Seoul Metropolitan Area.

Figure 4. Internal migration aggravates regional divergences

Cumulative net migration of 15–29-year-olds since 1995

Note: “Seoul metropolitan area” comprises Seoul, Incheon and Gyeonggi. “Other metropolitan areas” aggregate the cities of Busan, Daegu, Daejeon, Gwangju, Sejong and Ulsan. “Provinces” refer to the remaining non-metropolitan TL2 regions.

Source: Ministry of Data and Statistics; and OECD calculations.

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MAIN FINDINGS	KEY RECOMMENDATIONS
Responding to macroeconomic challenges
Domestic demand is improving but remains weak. The government’s budget plan foresees deficits excluding social security of around 4% of GDP in the next few years.	Use fiscal policy to support domestic demand but consolidate in the medium term.
Deficits have been mounting and fiscal pressures from ageing are set to intensify.	Create broad political consensus on a strengthened fiscal framework, including medium-term fiscal objectives and mandatory spending restructuring consistent with long-term sustainability.
The pensionable age is currently 63, one of the lowest in the OECD, and set to increase more slowly than in other OECD countries. The maximum age for pension contributions is 60 years.	Raise the pension eligibility age further than currently legislated by 2035, link the maximum pension contribution age to the pension eligibility age, and link both to life expectancy thereafter.
The energy supply shock is set to drive inflation above target in the medium term, while domestic price pressures remain limited.	Look through inflationary pressures from the energy price shock, while standing ready to tighten to keep long-term inflation expectations anchored.
Tax reform for shared prosperity
Ageing will increase spending pressures, which will likely require raising the overall tax revenue in the decades to come. The most efficient taxes, the Value Added Tax and taxes on harmful activities, are relatively low.	Prioritise the Value Added Tax and corrective taxes to meet increasing revenue needs going forward.
90% of allowances to Koreas Emission Trading System will be freely allocated in the period from 2026-30, leading to continued concerns regarding efficiency and liquidity.	Auction a higher share of allowances to the Emissions Trading System in regular auctions.
Korea’s multiple Corporate Income Tax brackets on companies of different sizes distort incentives, encouraging businesses to stay small or split to keep tax benefits.	Gradually transition to one uniform Corporate Income Tax rate while reducing tax expenditures.
In 2023, 33% of Korean wage earners were exempt from Personal Income Tax. This is to some extent due to a large number of tax expenditures, including the expansion of the Earned Income Tax Credit.	Broaden the Personal Income Tax base and reduce the number of exempt taxpayers by streamlining the tax expenditure system.
Property taxes are high, but dominated by transaction taxes instead of less distortive recurrent taxes.	Shift taxation of immovable property away from transaction taxes towards recurrent taxes.
Strengthening life-long learning
Teaching hours in primary education are low, while spending on after-school private tutoring is high and rising. This contributes to pressure on pupils and makes it challenging to combine work and motherhood.	Continue to expand and improve quality in-school care before and after the school day and foster a combination of topics reflecting a broad range of interests.
Tax revenue is earmarked for primary and secondary education, resulting in high spending per pupil, while young cohorts are shrinking. Spending in tertiary education is low, and tuition fees for tertiary education have effectively been capped since 2012.	Allow tuition fees in tertiary education to rise while gradually reducing the earmarking of tax revenue for primary and secondary education.
A dual labour market reduces incentives to invest in skills in time-limited employer-employee relationships.	Break down labour market dualism by relaxing employment protection for regular workers, while expanding social insurance enrolment.
Reshaping the geography of opportunity
Local governments combine high spending responsibilities with limited actual spending autonomy and low taxing power, leaving them heavily dependent on central transfers and policy directions.	Bolster fiscal autonomy of local governments by increasing their taxing power and granting more spending autonomy in delivering essential services such as transport, health and housing.
Devolution risks further straining the intergovernmental fiscal framework amid fragmented coordination, misalignment between administrative and functional areas and scale effects in demographically declining regions.	Strengthen inter-ministerial, inter-municipal coordination and local governance, and systematically use demographic foresight to guide fiscal equalisation and public investment decisions.
Regional development instruments are not clearly tied to specific places or priority locations, risking dispersed investments, diluted scale effects, weak complementarities, and continued suburban expansion.	Concentrate infrastructure investments on functional regional hubs and strengthen network-based linked development between hubs and hinterlands.
Upward social mobility is increasingly contingent on studying at flagship universities in Seoul, access to which has become severely constrained by regional disparities in income and wealth.	Strengthen the competitiveness of flagship universities in non-SMA hub cities and foster linkages with core regional industries.
Crisis response zones are effective at providing short-term stabilisation in regions exposed to acute industrial shocks, helping to preserve employment and economic activity during periods of adjustment.	Condition support in crisis response zones on concrete, time-bound restructuring commitments to avoid locking in declining activities.
A highly centralised and rigid land-use governance system constrains redevelopment in the Seoul metropolitan area and limits adaptive reuse and regeneration in declining rural regions.	Streamline the land-use planning framework by clarifying responsibilities across levels of government and granting municipalities greater regulatory flexibility.