The South Korean government has unveiled a record budget increase, channeling a tax windfall driven by the artificial intelligence semiconductor boom back into AI and other future-focused industries. The move comes as President Lee Jae-myung launches the nation's largest-ever spending expansion.

The administration of Lee Jae-myung on Tuesday presented a 820.9 trillion won ($598 billion) budget for 2027, marking a 12.8% increase from the previous year. The proposal includes a 162.3 trillion won "future response fund" — structured similarly to an endowment — which will be primarily financed by sharply higher tax contributions from chipmakers such as Samsung Electronics and SK Hynix. This marks South Korea's first double-digit budget growth since 2009, when Seoul boosted spending by 10.6% to combat the global financial crisis.

Budget Minister Park Hong-keun stated the government aims to create a "growth-led virtuous cycle," where public expenditure acts as a catalyst for economic expansion, which in turn bolsters public finances. South Korea is currently in a favorable economic position thanks to the global AI boom, which has spurred explosive demand for memory chips, lifted profits of major chip manufacturers, and driven a significant rally in the domestic stock market. Some of these gains are already reaching workers, with semiconductor industry employees receiving substantial special bonuses.

The new budget allocates 2.6 trillion won ($1.9 billion) for the chip industry, along with funding for data centers and robotics. A further 3.4 trillion won ($2.5 billion) is earmarked for strategic weapons, including a nuclear-powered submarine project. The "future response fund" will see an initial deployment of 45.4 trillion won ($33.1 billion) next year. Seoul is also increasing social spending, with a focus on younger generations and families, while providing financial support to struggling regions outside the greater Seoul metropolitan area.

President Lee has pledged to increase investment in local universities, which are facing a crisis due to South Korea's declining birth rate. The budget office projects government revenue will hit a record 880.8 trillion won in 2027, nearly 60 trillion won above planned expenditures. Public debt as a share of GDP is expected to decline to 48.3% next year from 51.6% in 2026. "Compared with other advanced economies, Korea's debt level is relatively low, so it's not a bad idea to use fiscal policy to tackle structural challenges such as the demographic crisis by raising the potential growth rate," said Park Jong-hoon, head of research at Standard Chartered Bank in Seoul.

The major increase in public spending comes as the Bank of Korea tightens monetary policy to alleviate inflationary pressures partly fueled by the chip boom. The central bank raised its benchmark rate to 3% last week, its second consecutive hike. Lee Jae-myung remarked on Tuesday that the rate increase was "inevitable," but added that "fiscal policy needs to play a carefully calibrated role in cushioning the impact of rate hikes on vulnerable groups while ensuring that the growth potential is not undermined." The Bank of Korea has also raised its economic growth forecasts for 2026 and 2027 to 3.3% and 2.9%, respectively.

However, some analysts question the wisdom of such large-scale fiscal expansion, citing inflation running above the central bank's target, high housing prices in Seoul, and expanding household debt. "The Korean economy is not just overheated now, it's burning hot," said Kim Woo-cheol, a tax professor at Seoul National University. "A fiscal expansion of this magnitude is wholly inappropriate in the current situation." Shin Yul, a political science professor at Myongji University, added, "Nobody knows how much longer the semiconductor boom can last."

Lee Jae-myung is also working to reverse his declining approval rating. A poll released Monday showed his support at a record low of 38.9%, down from 48.9% in the second week of July. His top policy adviser, Kim Yong-beom, resigned Tuesday. This follows a weekend cabinet reshuffle that appointed new finance and defense ministers. The budget proposal still requires parliamentary approval, but Lee's Democratic Party holds 161 of the 300 seats in the National Assembly, allowing it to pass legislation without cross-party consensus.