South Korea unveils record budget increase to cash in on AI boom

South Korea has unveiled plans to plough a tax windfall from the AI-driven semiconductor boom back into AI and other future industries as President Lee Jae Myung launched the country’s biggest spending increase on record.

Lee’s government on Tuesday unveiled a Won820.9tn ($598bn) budget for 2027, up 12.8 per cent from the previous year. That includes Won162.3tn for an endowment-style “Future Response Fund”, financed largely by soaring tax receipts from chipmakers such as Samsung Electronics and SK Hynix.

The figure marks the first double-digit increase to the budget since 2009, when Seoul lifted spending by 10.6 per cent in response to the global financial crisis.

Budget minister Park Hong-geun said that the government was targeting a “growth-led virtuous cycle” in which public spending would act as “priming water” for economic growth, which in turn would strengthen public finances.

South Korea has been in an economic sweet spot, thanks to the global AI boom, which has created explosive demand for its memory chips, boosted the profits of its largest chipmakers and driven dizzying rallies on domestic markets. Some of that revenue has also begun to trickle down to employees, with windfall bonuses for semiconductor workers.

The new budget will allocate Won2.6tn ($1.9bn) for the chip sector, as well as funding for data centres and the robotics industry. Another Won3.4tn ($2.5bn) will go towards strategic weapons, including a nuclear-powered submarine programme. The “Future Response Fund” will begin by deploying Won45.4tn ($33.1bn) next year.

Seoul will also increase social expenditure, particularly for young people and families, alongside allocations for struggling regions outside the Seoul metropolitan area. Lee has promised to raise investment in regional universities, which are facing a crisis from the country’s declining birth rate.

The budget ministry projected record government revenues of Won880.8tn for 2027, exceeding planned expenditure by almost Won60tn. Public debt-to-GDP is forecast to fall from 51.6 per cent for 2026 to 48.3 per cent next year.

“Since Korea’s debt level is relatively low compared with those of other advanced countries, it would not be a bad idea to boost potential growth in order to address structural challenges such as the demographic crisis,” said Chong Hoon Park, head of research at Standard Chartered in Seoul.

The surge in public spending comes as the central bank is tightening monetary policy to calm inflationary pressure driven in part by the chip boom. The Bank of Korea last week raised its benchmark interest rate to 3 per cent, its second consecutive increase .

Lee said on Tuesday that higher rates were “unavoidable”, but added that “fiscal policy needs to play a carefully calibrated role in minimising the pain for vulnerable groups caused by higher rates and ensuring that growth potential is not damaged”.

The BoK also upgraded growth forecasts to 3.3 per cent for 2026 and 2.9 per cent for 2027.

But some analysts questioned the wisdom of a sweeping fiscal expansion, with inflation running above the BoK’s target, high property prices in Seoul and expanding household debt.

“The economy is not just hot right now; it is boiling hot,” said Kim Woo-chul, professor of taxation at the University of Seoul. “A fiscal expansion of this scale is completely inappropriate for the current situation.”

Shin Yul, professor of politics at Myongji University, added: “No one knows how long the semiconductor boom will last.”

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Lee is also battling to reverse his sliding popularity. A survey released on Monday showed his approval rating had hit a record low of 38.9 per cent, down from 48.9 per cent in the second week of July.

Top policy adviser Kim Yong-beom resigned on Tuesday, following a cabinet reshuffle at the weekend that installed new finance and defence ministers.

The budget bill requires parliamentary approval, but Lee’s Democratic Party holds 161 of the 300 seats in the national assembly, enabling it to secure passage without cross-party consensus.

Additional reporting by Kang Buseong in Seoul