Jon Pareliussen, head of the Korea desk at OECD / Courtesy of Jon Pareliussen

President Yoon Suk Yeol was right to veto the main opposition party-led bill to provide blanket per capita cash handouts of 250,000 won ($185) to help revitalize the economy, a senior economist at the OECD said.

Korea's public debt remains low compared to most OECD countries, and any single new spending item will not in itself derail Korea's fiscal position.

However, spending adds up and is often hard to reverse. Worse still, spending pressures will increase due to rapid aging. This means that Korea should be careful to balance budgets to ensure important public services and social transfers can be delivered in the future.

"The cash handout proposal was vetoed. I think this was the correct decision in a situation where you have tax shortfalls and spending pressures combined with a fight to control inflation," Jon Pareliussen, head of the Korea desk at the OECD, said in an interview with The Korea Times.

"The cash handout could help revive private consumption, which would be positive, but in our latest economic survey, we pointed to a number of reforms that would achieve the same in a better and cheaper way, including pension reform, expanding eligibility to parental leave and employment insurance."

The bill failed to pass the National Assembly, Sept. 26, and was discarded.

The National Assembly is in session, Sept. 26. Yonhap

Bank of Korea Governor Rhee Chang-yong / Yonhap

BOK rate cut

The international organization believes that the Bank of Korea (BOK) will cut the policy rate for the first time in its October or November meeting and continue with gradual rate cuts to reach 2.5 percent by the middle of next year.

Headline inflation eased to the central bank's target of 2 percent in August, satisfying the key condition for price stability, which he believes is conducive to easing.

The central bank is therefore expected to start cutting rates at its next meeting in October to make sure they do not de-anchor inflation expectations. Otherwise, monetary policy will become ineffective in the future.

"The inflation target should take priority when the BOK sets monetary policy. Any other policy reaction would be risky and costly, and the central bank is aware of that."

Financial Services Commission Chairman Kim Byoung-hwan / Yonhap

DSR, debt

The new debt service ratio measure makes sure that borrowers can handle rising rates in the future, he said.

The household debt curb drive overseen by the Financial Services Commission applies add-ons to evaluate borrowers' debt repayment capabilities relative to their income in a hypothetical scenario of a rate hike, thereby reducing the maximum amount borrowable. The previously delayed measure took effect Sept. 1.

"Borrowing rules are comparably tight in Korea, but they do not apply equally between financial institutions," he said.

"Banks are tightly regulated while, for example, credit cooperatives face less tight limits. There is also an issue that tight caps on mortgages increase unsecured lending, which is also used for housing. I would therefore say that applying more equal lending standards across the board should be a priority."

Korea's public debt remains relatively modest, at approximately 50 percent of GDP.

However, long-term fiscal buffers are needed, underpinned by a fiscal rule and various reforms to increase employment and postpone retirement, in his view.

"It is not easy to say if the level of debt is too high for households and companies. However, if debt grows very fast over a period of time, it is generally a warning sign of financial stability risk. I cannot see that Korea has reached this point yet, but it makes sense for Korea's financial authorities to pay close attention and take some measures to avoid ending up in a difficult situation later on."

An apartment complex in Seoul / Yonhap

Project financing

Delinquencies are on the rise, but from a low level, he said.

The weakest spot within the financial system for the moment lies in construction-related project finance, where approximately 10 percent of outstanding debt is of a low quality.

However, project finance debt is a small share of total debt in Korea, and restructuring is going ahead as a policy priority.

"Upon completion of restructuring, authorities should harmonize rules and supervision between banks and non-bank financial institutions to build resilience across the financial sector, including loans to households and small businesses."

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Tunneling, Korea discount and inheritance tax

Chaebol owner families channel profits to companies in which they hold higher ownership at the expense of other minority shareholders, in what is often called "tunneling."

This phenomenon is one important driver of the Korea discount, he said, and deserves full support for reform.

The term "Korea discount" refers to the wild undervaluation of Korean stocks relative to corporate performance and growth potential.

Lowering the inheritance tax could be part of a reform, but there is not sufficient evidence to say that simply reducing the tax rate or increasing the tax floor alone would have the desired effect, he said.

"Ideally, there should be a thorough expert evaluation beforehand on the most efficient reforms to reduce tunneling. If the inheritance tax is a major part of the problem, there may be different ways to solve this, for example, relating to how the tax base is measured and reported."

The goal should be to have a very transparent corporate scene with stable, consistent and investor-friendly policies over time, he added.

"Financial incentives to boost dividends and share buybacks may also have positive effects, as it will reward companies that hoard less cash."

Stock income tax for capital gains

Taxing personal income from capital gains and dividends at a fairly similar rate to the top marginal income tax can help raise revenue and reduce resources spent on tax planning and evasion.

However, the design of the tax is important, he said.

"It should, for example, apply equally for all types of capital income, which is not the case I see. I think it would make sense to look at a broader reform of capital income taxation and how it relates to other capital taxes and personal income taxation."