South Korea Proposes Record $761.6 Billion Budget to Accelerate AI Investment

South Korea has proposed its largest-ever annual increase in government spending, setting 2027 expenditure at 821 trillion won, or about $761.6 billion, as President Lee Jae-myung’s administration seeks to strengthen the country’s position in the global artificial intelligence race.

The budget ministry said spending would rise 12.8% from the 2026 plan, the biggest year-on-year increase on record. The proposal represents a shift toward expansionary fiscal policy after three years of austerity under Lee’s predecessor.

A semiconductor windfall is helping finance the plan. Samsung Electronics and SK Hynix have reported unprecedented profits from demand for high-bandwidth memory chips used in AI systems. South Korea expects tax revenue to rise 40.7% in 2027 to 584.4 trillion won, while corporate tax receipts are projected to more than double to 216.7 trillion won.

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It would have been better for the market if the government made a bigger reduction in bond sales.

The higher revenue is expected to lower the country’s debt-to-GDP ratio to 48.3%, from an estimated 51.6% in 2026. The government plans to reduce total bond sales to 222.8 trillion won from 225.7 trillion won, and cut net bond issuance by 13.1 trillion won to 96.3 trillion won.

Markets had expected a deeper reduction. The yield on South Korea’s 10-year government bond rose 6.5 basis points to 4.378% after the announcement. “It would have been better for the market if the government made a bigger reduction in bond sales,” said Kong Dong-rak, an analyst at Daishin Securities. He added that lower net issuance was positive, but adjustments to reduce long-dated debt would help stabilize the domestic bond market.

Rather than use the projected 162.3 trillion won tax surplus for short-term spending, the government plans to place it in a Future Response Fund. The fund will spend 45.4 trillion won in 2027 on youth welfare, future growth industries and specialized education. A further 21.3 trillion won will support industrial water systems, power grids and logistics networks for next-generation semiconductor production.

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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.