Heavy Investment in AI! South Korea Unveils $597 Billion Most Aggressive Spending Plan in History, with Chip Gains Providing "Ammunition"

On Tuesday, South Korea announced its most aggressive fiscal spending plan ever, setting total government spending for 2027 at 821 trillion won (approximately $596.92 billion) aimed at strengthening the countrys technological advantage in the global artificial intelligence (AI) race. The South Korean Ministry of Budget stated in its annual budget proposal that this spending plan represents a 12.8% increase from 2026, marking the highest year-on-year growth on record. This proposal signifies a policy shift for the fourth-largest economy in Asia under President Lee Jae-myung. Since taking office in June last year, Lee has been advocating for expansionary fiscal policies, reversing the austerity measures of his predecessor that lasted for three years. Semiconductor Boom Provides "Ammunition" for Fiscal Expansion The surplus tax revenue generated by South Korea's semiconductor industry has driven historical spending growth. The global AI infrastructure boom has ignited demand for high-bandwidth memory (HBM), leading to unprecedented profits for South Koreas memory giantsSamsung Electronics and SK Hynix. Next year, South Korea's total tax revenue is expected to increase by 40.7%, reaching 584.4 trillion won, with corporate income tax revenue expected to double to 216.7 trillion won. The surge in revenue is anticipated to help South Korea reduce its debt-to-GDP ratio from an estimated 51.6% this year to 48.3%, a decrease of 3.3 percentage points. Cutbacks Less Than Market Expectations, South Korean Bond Yields Rise Rather Than Fall Some of the surplus tax revenue will be used to reduce government borrowing. Next year, the total issuance of South Korean government bonds will decrease from this years budget of 225.7 trillion won to 222.8 trillion won. The net bond issuance reflecting new sovereign debt is expected to drop significantly by 13.1 trillion won to 96.3 trillion won, down from 109.4 trillion won this year. Nonetheless, following the budget announcement, the yield on South Korean 10-year government bonds rose by 6.5 basis points to 4.378%, indicating that the market initially expected the government to further cut bond issuance amid a global bond sell-off. Kong Dong-rak, an analyst at Daishin Securities, stated: "If the Korean government could further reduce the bond issuance volume, it would be more beneficial for the market." He added that domestic bond yields in South Korea have continued to rise amid a global long bond sell-off. "The decline in net issuance plans is a positive development. Some adjustments to reduce long-term debt allocations will help stabilize the local bond market," he remarked. Establishment of the "Future Response Fund," Focusing on Semiconductor Infrastructure and Defense as Key Spending Areas The South Korean government plans to invest the expected surplus tax revenue of 162.3 trillion won into a strategic donation fund named the "Future Response Fund," rather than using it for short-term spending. The fund is intended for long-term investment. Next year, the fund will allocate 45.4 trillion won for projects aimed at enhancing youth welfare, future growth engines, and specialized education. One of the key spending directions for 2027 will be to support next-generation semiconductor infrastructure. The South Korean government has allocated 21.3 trillion won for the construction of industrial water supply systems, power grids, and logistics networks to enhance chip manufacturing capabilities and promote critical technology infrastructure development. In addition, the South Korean government has set aside 2.6 trillion won as a special budget for semiconductors. The government also proposed to allocate 3.4 trillion won for the nuclear-powered submarine project and other strategic weapons. This budget proposal still requires approval from the National Assembly. On Tuesday, Lee Jae-myung stated that the South Korean economy is at a critical juncture for inevitable interest rate hikes, which may put pressure on economic growth as vulnerable households face higher borrowing costs. Due to the semiconductor boom exacerbating inflation risks, the South Korean central bank raised the benchmark interest rate by 25 basis points to 3.00% at the end of August, marking the first back-to-back rate hikes since January 2023. Bank of Korea Governor Rhee Chang-yong stated that consecutive rate hikes are not normal operations but send a "strong signal." He expects interest rates to gradually increase over the next six months.