Korea drafts record budget proposal aimed at using chip boom to boost growth

South Korea has unveiled a budget proposal for 2027, amounting to 820.9 trillion won (approximately US$601 billion), marking a 12.8% increase from the previous year's budget. This marks the Lee administration's second consecutive year of expansionary fiscal policy. The surge in government spending, totaling 93 trillion won, is the largest on record in both absolute and percentage terms.

The government anticipates that the burgeoning semiconductor industry will generate significant tax revenue, which will be allocated to growth engines and utilized in a separate "fiscal reservoir." Rather than repaying debt, the surplus funds will be deposited in the reserve, aimed at maintaining stability in the bond market. Although the government will issue 222.8 trillion won in Korea Treasury bonds next year, a portion of the increased tax revenue will be invested in various sectors, including young people, growth engines, balanced regional development, and education and talent.

The budget also earmarks substantial funds for three major projects: semiconductors, physical AI, and AI data centers. Investments in these areas are expected to nearly double, with a special account allocated for semiconductors and significant funding directed towards AI development, including the creation of a domestic AI model and free public services like "AI for All."

Additionally, the government plans to enhance support for young Koreans through measures such as income requirement changes, expanded eligibility for savings accounts, and increased public housing near metro stops.

Despite the significant increase in spending, the government projects a surplus in the consolidated fiscal balance of 59.9 trillion won, or 0.1% of GDP. This improvement is attributed to the surge in nominal GDP, which will aid in reducing Korea's national debt-to-GDP ratio from 51.6% to 48.3%. The government aims to strike a balance between debt reduction and maintaining a stable bond market, emphasizing the importance of prudent fiscal policy amid economic growth.