(EDITORIAL from Korea Herald on Aug. 28)

South Korea's government is planning to boost its budget for 2027, increasing spending by more than 10% from the previous year's figure. President Lee Jae Myung advocates for "productive" fiscal management, emphasizing the need for public investment in technologies and infrastructure to boost the country's weak potential growth.

However, a significant portion of the government's fiscal room comes from a semiconductor boom and strong stock trading. National tax revenue is expected to exceed earlier forecasts by over 100 trillion won, with some estimates suggesting the eventual figure could surpass 600 trillion won. Still, the revenue from semiconductor-driven earnings can fluctuate with memory prices and global demand.

While the government proposes measures such as full tuition support for regional national universities and expanded assistance for children and young people, these recurring commitments may prove difficult to unwind when revenues decline. The Future Response Fund, set aside for strategic projects, could reach 100 trillion to 200 trillion won and potentially cushion tax revenue fluctuations. Yet, without proper oversight, it could create another channel for spending beyond the regular budget or duplicate existing programs.

Policymakers must exercise caution to avoid treating a temporary revenue windfall as a permanent expansion of government spending. While targeted investments in frontier technologies like artificial intelligence, aerospace, and semiconductors are justified, combining strategic industrial policy with broad, permanent social transfers could dilute fiscal impact and lock up state resources.

Furthermore, a rapid fiscal expansion could potentially lead to inflationary pressures, creating a conflict with a central bank attempting to control demand through monetary policy. Rising borrowing costs would erode the benefits of public spending meant to provide growth. Korea's demographic outlook, with the OECD warning that government debt could surge from 51.4% of GDP to around 200% by 2050, underscores the importance of preserving fiscal room during periods of strong revenue rather than consuming it through long-term commitments.

The government's commitment to restructuring 50 trillion won in existing spending will serve as the true test of its dedication to productive fiscal management. While South Korea may have discovered a fiscal principle that works in both bad times and good, the challenge lies in ensuring that a government's spending does not progress from managing the cycle to escaping it entirely.