SEOUL, Aug 29 (Reuters) – South Korea plans to significantly increase its government spending in 2026, marking the largest rise in four years, as President Lee Jae Myung pushes forward an economic strategy centered on artificial intelligence development. The finance ministry announced a total expenditure of 728.0 trillion won ($524.44 billion) for the upcoming fiscal year, representing an 8.1% increase from 2025. This growth surpasses the current year’s 2.5% rise and is the most substantial since 2022, not counting supplementary budgets introduced in 2024.
The new administration, which took office on June 4, has shifted toward expansionary fiscal measures, diverging from the prior government’s focus on maintaining budgetary discipline. Last week, officials outlined economic priorities that place AI investment at the forefront, especially as growth forecasts are revised downward due to U.S. trade tariffs and long-term demographic challenges.
Finance Minister Koo Yun-cheol emphasized the need for proactive fiscal action, stating that policy should help ignite economic recovery. The country’s economy expanded at its quickest rate in over a year during the second quarter, supported by strong tech exports and improved consumer demand. However, recent U.S. tariff hikes pose a threat to continued momentum.
The Bank of Korea held its policy rate steady for the second consecutive meeting but signaled potential future easing to mitigate the impact of external trade pressures. The fiscal deficit is projected to rise to 4.0% of GDP in 2026, up from 2.8% in 2025, as tax revenues are expected to grow only 3.5%, reaching 674.2 trillion won. Meanwhile, the national debt relative to economic output is forecast to climb from 48.1% to 51.6%.
Beyond 2026, the government intends to moderate spending growth, aiming for an average annual increase of 5.5% between 2025 and 2029. By the end of that period, the debt-to-GDP ratio could reach 58.0%.
Social welfare allocations will rise by 8.2% to 269.1 trillion won, with new initiatives aimed at addressing the world’s lowest fertility rate. Research funding will jump by a record 19.3% to 35.3 trillion won, primarily directed toward AI advancement. Industrial policy spending will grow 14.7% to 32.3 trillion won to assist exporters affected by tariffs, while cultural sector investment will increase 8.8% to 9.6 trillion won, capitalizing on the global popularity of Korean content.
Defense spending will also rise by 8.2% to 66.3 trillion won—about 2.4% of GDP—amid increasing U.S. expectations for allied nations to boost military outlays. To finance the deficit, the government plans to issue 232 trillion won in treasury bonds, with a net increase of 115.7 trillion won. Of this, 110 trillion won is expected to cover the shortfall. Additionally, the issuance cap for foreign exchange stabilization bonds will be set at $1.4 billion for dollar-denominated and 13.7 trillion won for won-denominated instruments.
The budget proposal will be submitted to the National Assembly, where the ruling Democratic Party holds a majority, for final approval.
($1 = 1,388.1500 won)
Reporting by Jihoon Lee Editing by Ed Davies
— News Original —
South Korea to boost budget spending in bid to spur AI-led growth
SEOUL, Aug 29 (Reuters) – 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. n nIn 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. n nSign up here. n nPresident 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. n nLast week, the government unveiled economic policy plans with a top priority on AI investment, as it slashed growth projections amid downward pressure from U.S. tariffs and a long-term population shock. n n”Fiscal policy needs to prime the pump to grow the spark of recovery,” Finance Minister Koo Yun-cheol said. n nAsia ‘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 U.S. tariffs introduced this month. n nThe 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 U.S. tariffs. n nSouth 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%. n nAfter 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. n nSpending 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. n nSpending 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. n nAmid growing U.S. pressure to lift defence spending, it will be raised by 8.2% to 66.3 trillion won – equivalent to around 2.4% of GDP. n nThe 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. n nThe 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. n nThe budget plan will be submitted to the National Assembly, currently controlled by the ruling Democratic Party, for approval. n n($1 = 1,388.1500 won) n nReporting by Jihoon Lee Editing by Ed Davies