SEOUL, September 01 (AJP) -Seoul has proposed a record 820.9 trillion won ($599 billion) budget outline through its biggest-ever increase of nearly 13 percent, riding on the chip windfall to invest in future growth instead of increasing immediate spending that can go counter to tightening monetary policy.
Total spending for 2027 will rise 93 trillion won, or 12.8 percent, from this year's original budget, crossing the 800 trillion won threshold for the first time and exceeding the 10.6 percent increase recorded in 2009 during the global financial crisis.
The expansion differs from past emergency periods because it is being financed by excess tax revenue generated by red-hot chip exports, corporate earnings and the stock-market rally, rather than resorting to national reserves or debt.
Total government revenue is projected to surge 30.4 percent to 880.8 trillion won next year. National tax revenue alone is expected to jump 49.8 percent to 584.4 trillion won.
The spending targets also differ from past periods of fiscal expansion.
At the center of the plan is a new 162.3 trillion won Future Response Fund designed to prevent the extraordinary tax windfall from simply flowing into ordinary government expenditure.
The fund will be financed primarily with tax revenue exceeding the 10-year trend in domestic tax collections, effectively setting aside much of the upside from the current revenue boom for longer-term investment and a fiscal buffer.
Of the amount accumulated next year, 45.4 trillion won will be deployed across four priority areas: 14.2 trillion won for future growth engines, 13.3 trillion won for younger generations, 10.3 trillion won for regional development and 7.6 trillion won for education and talent.
New projects include 4.7 trillion won for frontier-level artificial intelligence development and 1.4 trillion won for universal public rental housing.
Projects will be selected under what the government calls its "NEXT" principle, standing for New-capital, Enterprising investment, flexible execution and Timely deployment.
Another 12.5 trillion won will be used to reduce new government bond issuance.
The government argues against using the entire windfall for large-scale debt repayment, saying an abrupt reduction in government bond issuance could disrupt the government bond market.
That leaves 104.4 trillion won in reserve, which will be supplemented by any additional excess tax revenue identified when the government revises its revenue estimate later this month. Government officials have raised the possibility that the fund could ultimately approach 200 trillion won in its first year.
The unprecedented fiscal expansion nevertheless jolted the bond market. The three-year government bond yield rose 4.5 basis points to 3.883 percent by midday Tuesday, while the benchmark 10-year yield climbed 6.5 basis points to 4.378 percent.
The selloff was sharper at the longer end of the curve, reflecting concerns over the longer-term debt outlook. The 20-year yield surged 8.6 basis points to 4.576 percent and the 30-year yield jumped 9.5 basis points to 4.622 percent.
Other financial markets also weakened. The won fell to 1,370.7 against the U.S. dollar, while the KOSPI reversed earlier gains to trade 0.37 percent lower.
Planning and Budget Minister Park Hong-keun described the fund as "a strategic investment platform for using large-scale tax revenue for productive spending and a fiscal stabilization mechanism that improves the efficiency of fiscal management."
President Lee Jae Myung acknowledged that tension Tuesday as the Cabinet approved the spending plan.
"Higher interest rates are unavoidable now," Lee said. "Fiscal policy must play a finely calibrated role in minimizing the pain for vulnerable groups caused by higher rates and ensuring that growth potential is not damaged."
The BOK last week raised its benchmark interest rate for a second consecutive meeting to 3 percent, maintaining a hawkish stance as stronger economic growth and persistent inflation reduced the case for monetary easing.
Budget Minister Park argued that the record spending increase therefore should not be viewed as conventional fiscal stimulus aimed primarily at boosting consumption.
"The budget was not designed to scatter cash in populist handouts or concentrate on simple consumption spending," Park said.
Support for younger people and vulnerable households will inevitably stimulate some demand, he said, but the greater emphasis has been placed on infrastructure, research and development and other investment intended to raise Korea's potential growth rate and productive capacity.
Such spending should ultimately be compatible with the BOK's longer-term goal of price stability, Park said.
"We need a productive virtuous-cycle fiscal strategy that uses increased future resources to enlarge the economic pie and upgrade industrial capabilities, which in turn expands fiscal capacity again," Lee said.
The government expects the spending to help reverse a prolonged decline in Korea's potential growth rate while spreading the gains from the current economic upswing more broadly.
"We should look at Korea's economic situation not on a single-year basis but as a long-term structural trend," Park said. "What deserves greater attention is the continued decline in growth potential and the potential growth rate."
He said active fiscal investment was needed to make the current V-shaped economic recovery more durable.
The revenue boom gives Seoul unusual room to pursue that strategy.
South Korea's economy is expected to round above 3 percent this year thanks to the extraordinary chip exports, strongest since the post-pandemic rebound from recession-hit 2021.
National tax revenue reached 274 trillion won through July, up 41.4 trillion won, or 17.8 percent, from a year earlier.
Corporate tax receipts increased 4.4 trillion won to 51.8 trillion won, while securities transaction tax revenue more than quadrupled to 8.2 trillion won as trading activity surged.
Income tax collections rose 12.2 trillion won to 89.3 trillion won, helped by stronger wages, performance bonuses and property transactions.
The government had collected 66 percent of its revised full-year tax target by the end of July, compared with 60.8 percent a year earlier.
Much of the fiscal expansion will be directed toward industries and infrastructure Seoul believes can extend the current growth cycle.
The government will spend 21.3 trillion won, up 97.2 percent from this year, on three mega projects aimed at maintaining Korea's semiconductor advantage, establishing leadership in physical AI and expanding the power, water and industrial infrastructure needed to support them.
Another 62.8 trillion won, up 22.7 percent, will go toward future growth engines including advanced strategic industries and the energy transition.
Programs for younger Koreans will receive 43.3 trillion won, an increase of 53.5 percent.
The largest allocation, 117.1 trillion won, will go toward what the government calls "growth for all," covering regional development and support for small businesses, farmers, fishermen and vulnerable workers.
Another 38.3 trillion won will be spent on national security, supply-chain diversification, disaster preparedness and equipment needed for the planned transition of wartime operational control.
The government will simultaneously pursue 107.6 trillion won in expenditure restructuring to make room for its priorities.
Of that amount, 38.6 trillion won will come from discretionary spending cuts targeting small, habitual, unnecessary, low-performing and overlapping programs.
Another 69 trillion won will come from mandatory expenditure changes, including reforms to tax-linked transfers to local governments and education authorities.
Despite the record spending increase, the government's fiscal indicators are projected to improve sharply because revenue is rising even faster.
The managed fiscal deficit is forecast at just 0.1 percent of gross domestic product next year, compared with 3.9 percent under this year's original budget.
Park described the plan as a historic attempt to catch "two rabbits" at once: economic growth and fiscal soundness.
The government plans to gradually moderate expenditure growth after next year, to 9 percent in 2028, 7 percent in 2029 and 5 percent in 2030.
It aims to bring the managed fiscal deficit below 3 percent of GDP during Lee's term and lower the national debt ratio to around 48 to 49 percent.
Seoul fears a reversal in the chip cycle could quickly weaken corporate tax receipts and argues the Future Response Fund is designed partly as protection against that risk, separating a large portion of above-trend revenue from ordinary spending and keeping more than 100 trillion won available to absorb future fiscal shocks.
The government is seeking to amend the National Finance Act to allow spending under major categories of the fund to be changed by as much as 30 percent by presidential decree without prior parliamentary approval.
The 2027 budget will be submitted to the National Assembly by Sept. 3. Parliament has until Dec. 2 to approve it.
○ South Korea proposed a record 820.9 trillion won budget for 2027, raising spending 12.8 percent as a semiconductor- and stock-market-driven tax windfall sharply expands government revenue.
○ A new 162.3 trillion won Future Response Fund will channel above-trend tax receipts into AI, future growth engines, youth and regional development while retaining more than 100 trillion won as a fiscal buffer.
○ President Lee Jae Myung and Planning and Budget Minister Park Hong-keun argue the spending surge does not conflict with BOK tightening because the budget emphasizes productive investment and targeted support rather than broad consumption stimulus.
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