SEOUL, Sept 1 (Reuters) - South Korea on Tuesday unveiled its most aggressive fiscal spending plan on record, setting total government expenditure for 2027 at 821 trillion won ($596.92 billion) to strengthen the country's technological edge amid the global AI race.
In its annual budget proposal, the budget ministry said the spending plan represented a 12.8% rise from 2026, marking the largest year-on-year increase on record.
The proposal signals a shift in Asia’s fourth-largest economy under President Lee Jae-myung, who has championed an expansionary fiscal policy since taking office in June last year, pivoting away from three years of austerity under his predecessor.
The historic spending increase is being fuelled by a windfall from the country's semiconductor industry.
Samsung Electronics <005930.KS> and SK Hynix <000660.KS> are generating unprecedented profits driven by global demand for high-bandwidth memory (HBM) chips used in the AI boom.
Total tax revenue is seen increasing 40.7% next year to 584.4 trillion won, with corporate tax receipts alone projected to more than double to 216.7 trillion won.
The revenue surge is expected to help reduce South Korea's debt-to-GDP ratio by 3.3 percentage points to 48.3%, down from an estimated 51.6% this year.
BOND YIELDS UP
Part of the tax windfall will be allocated to curb government borrowing. Total government bond sales for next year will drop to 222.8 trillion won, down from 225.7 trillion won in this year’s budget.
Net bond issuance, which reflects the creation of fresh sovereign debt, will decline even more sharply by 13.1 trillion won to 96.3 trillion won, down from 109.4 trillion won this year.
Despite this, yields on South Korea's 10-year government bond rose 6.5 basis points to 4.378% after the budget was announced, in a sign that the market had anticipated a deeper reduction in bond sales next year amid a global bond slump.
"It would have been better for the market if the government made a bigger reduction (of bond sales)," said Kong Dong-rak, an analyst at Daishin Securities, adding that local bond yields have been climbing amid a global selloff in long-dated bonds.
"It's good that the net issuance plans are also down. Some adjustments to reduce the allocations of long-dated debt" will stabilise the local bond market, he said.
FUTURE RESPONSE FUND
Rather than channeling its projected 162.3 trillion won of excess tax revenue into short-term spending, the government plans to direct it into a strategic endowment called the Future Response Fund, designed for long-term investments.
The fund will deploy 45.4 trillion won next year to expand initiatives in youth welfare, future growth engines and specialised education programmes.
For 2027, a key spending priority will be to support next-generation semiconductor infrastructure.
The government has allocated 21.3 trillion won for industrial water systems, power grids and logistics networks to strengthen chip manufacturing and advance critical technology infrastructure nationwide.
The government earmarked 2.6 trillion won for a special semiconductor budget, Park told the cabinet meeting.
It also proposed 3.4 trillion won in spending for a nuclear-powered submarine programme and other strategic weapons, presentation material during the meeting showed.
The budget proposal will require parliamentary approval.
President Lee Jae Myung said on Tuesday the economy is at a point where an interest rate rise is unavoidable, potentially weighing on growth as vulnerable households grapple with higher borrowing costs.
($1 = 1,375.3900 won)
(Reporting by Jack Kim, Heejin Kim and Joyce Lee; Additional reporting by Moon Young TaeEditing by Ed Davies)
