South Korea plans steepest budget increase in 4 years, prioritizing AI investment

South Korea's government plans to raise budget spending for next year by the steepest pace in four years as the country's new president seeks to spur economic growth through a policy of boosting investment in artificial intelligence.

In its annual spending plan released on Friday, the finance ministry set total government expenditure for 2026 at 728.0 trillion won ($524.44 billion). That is up 8.1% from 2025, outstripping the 2.5% increase this year and marking the biggest jump since 2022, excluding the two supplementary budgets introduced so far this year.

President Lee Jae Myung, who took office on June 4, has vowed expansionary fiscal policy to boost growth, in contrast to the three years of the administration of his conservative predecessor Yoon Suk Yeol who prioritised fiscal sustainability.

Last week, the government unveiled economic policy plans with a top priority on AI investment, as it slashed growth projections amid downward pressure from US tariffs and a long-term population shock.

"Fiscal policy needs to prime the pump to grow the spark of recovery," Finance Minister Koo Yun-cheol said.

Asia's fourth-largest economy grew in the second quarter at the fastest pace in more than a year, on robust technology exports and a rebound in consumer spending, but faces headwinds from higher US tariffs introduced this month.

The country's central bank held interest rates steady for a second straight review on Thursday but flagged further easing to counter the hit to growth from US tariffs.

South Korea's fiscal deficit will widen to 4.0% of gross domestic product in 2026, sharply up from 2.8% in 2025, as tax revenue is projected to only rise 3.5% to 674.2 trillion won, the ministry said. The debt-to-GDP ratio is estimated to rise to 51.6% from 48.1%.

After next year, the government plans to slow expenditure growth to maintain it at an annual average rate of 5.5% for 2025-2029. It sees the debt-to-GDP ratio rising to 58.0% by 2029.

Spending on social welfare will be raised by 8.2% to 269.1 trillion won in 2026, with more government projects to try to boost the country's flagging birthrate - the lowest in the world.

Spending on research will be raised by a record 19.3% to 35.3 trillion won for AI investments and industrial policies by 14.7% to 32.3 trillion won to support tariff-hit exporters. Spending on the cultural industry will also rise 8.8% to 9.6 trillion won to further grow a sector riding a global boom.

Amid growing US pressure to lift defence spending, it will be raised by 8.2% to 66.3 trillion won - equivalent to around 2.4% of GDP.

The government will issue 232 trillion won of treasury bonds in 2026, with the net increase in bonds projected at 115.7 trillion won and planned issuance to finance the fiscal deficit seen at 110 trillion won.

The issuance ceiling of dollar-denominated and won-denominated foreign exchange stabilisation bonds will be set at $1.4 billion and 13.7 trillion won, respectively.

The budget plan will be submitted to the National Assembly, currently controlled by the ruling Democratic Party, for approval.