Push back on AI! South Korea offers the most aggressive spending plan in history of 597 billion US dollars with chip dividends to provide “ammunition”

The Zhitong Finance App learned that South Korea announced the most aggressive fiscal expenditure plan in history on Tuesday, setting the total government expenditure for 2027 at 821 trillion won (about 596.92 billion US dollars), with the aim of strengthening the country's technological advantage in the global artificial intelligence (AI) competition.

South Korea's Ministry of Budget stated in its annual budget proposal that the spending plan will increase by 12.8% compared to 2026, the biggest year-on-year increase in history.

The proposal marks a policy shift in Asia's fourth-largest economy under the leadership of President Lee Jae-ming. Since taking office in June of last year, Lee Jae-myung has been advocating expansionary fiscal policies, changing the austerity line that his predecessor continued for three years.

The semiconductor boom provides “ammunition” for fiscal expansion

Excess tax revenue from the Korean semiconductor industry has fueled historic spending growth. The global AI infrastructure boom has sparked demand for high-bandwidth memory (HBM), and South Korea's storage duo, Samsung Electronics and SK Hynix, have obtained unprecedented profits as a result.

South Korea's total tax revenue is expected to increase by 40.7% to 584.4 trillion won next year, of which corporate income tax revenue is expected to double to 216.7 trillion won.

A surge in revenue is expected to help South Korea reduce its debt as a share of GDP by 3.3 percentage points to 48.3% from the 51.6% forecast this year.

The cuts fell short of market expectations, and the yield on Korean treasury bonds did not fall but rose

Part of the excess tax will be used to reduce government borrowing. The total amount of Korean government bonds issued next year will drop from this year's budget of 225.7 trillion won to 222.8 trillion won.

Net bond issuance reflecting new sovereign debt will drop sharply by 13.1 trillion won to 96.3 trillion won, down from 109.4 trillion won this year.

Despite this, after the budget was announced, the yield on South Korea's 10-year treasury bonds rose 6.5 basis points to 4.378%, indicating that in the context of the global bond sell-off, the market originally expected the South Korean government to further reduce the scale of bond issuance.

Kong Dong-rak, an analyst at Daishin Securities, said, “It would be more beneficial to the market if the South Korean government could cut bond issuance more vigorously.” He added that in the midst of the global sell-off of long-term bonds, South Korea's domestic bond yields continued to rise. It's a good thing that net issuance plans are also declining. “Some adjustments to reduce the allocation of long-term debt will help stabilize the local bond market,” he said.

Establish a “Future Response Fund”, and semiconductor infrastructure and national defense have become key spending directions

The South Korean government plans to invest the estimated 162.3 trillion won in excess tax revenue into a strategic endowment fund called the “Future Response Fund” rather than using it for short-term expenses. The fund is intended to be a long-term investment.

The fund will use 45.4 trillion won next year to expand projects such as youth welfare, future growth engines, and specialized education.

One of the key spending directions in 2027 will be to support next-generation semiconductor infrastructure. The Korean government has allocated 21.3 trillion won for the construction of industrial water supply systems, power grids, and logistics networks to strengthen chip manufacturing capabilities and promote the construction of critical technical infrastructure.

In addition, the South Korean government has allocated 2.6 trillion won as a special budget for semiconductors. The South Korean government also proposed spending 3.4 trillion won for nuclear-powered submarine projects and other strategic weapons.

The proposed budget is yet to be approved by the National Assembly.

Lee Jae-myung said on Tuesday that the South Korean economy is at a point where interest rate hikes are inevitable, which may put pressure on economic growth as vulnerable households will face higher borrowing costs.

As the semiconductor boom increased the risk of inflation, the Bank of Korea raised the benchmark interest rate by 25 basis points to 3.00% at the end of August. This is the first time since January 2023 that it has raised interest rates twice in a row. Bank of Korea Governor Shin Hyun-song said that continuous interest rate hikes are not a normal operation, but rather a “strong signal.” He expects interest rates to rise gradually over the next six months.