"Increasing Fiscal Spending Still Struggles to Boost Economic Growth"… Full-Scale Entry into Super-Aged Society

If the elderly population increases by 1%P, growth effect decreases by 5.9%
Bank of Korea "Need to secure more fiscal capacity"

From 2025, when South Korea enters a super-aged society, the economic growth effect of increased government fiscal spending is expected to be smaller than in the past.

On the 2nd, the Bank of Korea announced this analysis result through a report titled "Analysis of the Impact of Population Structure Changes on the Growth Effect of Fiscal Spending."

According to the Bank of Korea, South Korea is experiencing population aging at a much faster rate compared to other countries, and it is expected to enter a super-aged society with over 20% of the population aged 65 or older by 2025.

Recent overseas studies have analyzed that changes in population structure, such as aging, not only negatively affect fiscal soundness but also weaken the impact of fiscal spending on gross domestic product (GDP).

Empirical analysis using South Korean data by the Bank of Korea also showed that population aging weakens the growth effect of fiscal spending in South Korea.

According to the report, when the proportion of the elderly population increases by 1 percentage point, the GDP growth effect of fiscal spending shocks decreases by 5.9%.

Due to rapid population aging in South Korea, labor supply is decreasing, the quality of employment among the elderly is deteriorating, and the propensity to consume is continuously weakening.

With rapid low birth rates and aging, the working-age population (ages 15?64) has been declining since 2018, and employment among the elderly is concentrated in simple jobs, limiting the effect of increased labor demand from expanded fiscal spending.

Moreover, as life expectancy increases and concerns about retirement and old-age preparation grow, the propensity to consume is sharply declining, especially among those aged 50 and older.

This means that as aging worsens in South Korea, it will be difficult to expect the same growth effects from increased government fiscal spending as in the past.

The Bank of Korea emphasized, "To achieve the government's economic growth contribution similar to that before aging through fiscal spending, more fiscal spending is required," adding, "As fiscal burdens increase significantly due to welfare spending growth and the growth effect of fiscal spending decreases, it is necessary to secure fiscal capacity from a mid- to long-term perspective."

Users are standing in a long line to have a meal at the free meal service center in Tapgol Park, Jongno-gu, Seoul. Photo by Hyunmin Kim kimhyun81@

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