IRIA News

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South Korea has unveiled a sharp budget increase for 2026, the biggest since 2022, with a strong focus on AI growth. The plan reflects President Lee Jae Myung’s push to boost economic growth through investment in artificial intelligence.

The Ministry of Finance released its annual spending plan on August 29, 2025, setting total government expenditure for 2026 at $524.44 billion. This represents an 8.1% rise from the 2025 budget, far outpacing this year’s 2.5% increase. It also marks the fastest pace of growth since 2022, excluding the two supplementary budgets introduced this year.

President Lee, who took office in June this year, has pledged an expansionary fiscal policy to accelerate growth, in stark contrast to his conservative predecessor, Yoon Suk Yeol, whose administration emphasized fiscal sustainability over aggressive spending.

AI investment as a policy priority

The government has put artificial intelligence at the center of its new economic strategy. Last week, it unveiled a broad economic policy roadmap with a top priority on AI investment, aiming to spur growth while facing challenges from U.S. tariffs and long-term demographic decline.

“Fiscal policy needs to prime the pump to grow the spark of recovery,” Finance Minister Koo Yun-cheol said while presenting the budget plan.

To underline this commitment, Seoul has proposed tripling its dedicated AI budget to more than $7.2 billion in 2026. The funds will support projects across robotics, automotive technology, health care, and public services, reflecting a strategy to integrate AI into core areas of the economy.

Spending on research and development will also rise by a record 19.3% to $25.4 billion, with industrial policy funding increased by 14.7% to $23.2 billion to help exporters adjust to higher U.S. tariffs.

Economic conditions and growth outlook

Asia’s fourth-largest economy expanded in the second quarter of 2025 at the fastest pace in over a year, supported by strong technology exports and a rebound in consumer spending. However, the outlook remains clouded by external pressures, most notably higher U.S. tariffs that took effect earlier this month.

In response, the Bank of Korea kept interest rates steady for a second consecutive review on Thursday but indicated that further monetary easing could follow to cushion the impact of trade frictions.

Rising deficit and debt projections

The finance ministry acknowledged that the new expansionary stance will deepen South Korea’s fiscal deficit. It projected the 2026 deficit at 4.0% of gross domestic product, up sharply from 2.8% this year.

Tax revenue is expected to grow only 3.5% to around $485.7 billion, well short of expenditure growth. As a result, the country’s debt-to-GDP ratio is forecast to climb from 48.1% in 2025 to 51.6% in 2026.

Looking further ahead, the government aims to slow expenditure growth to an annual average of 5.5% between 2025 and 2029. Even so, debt is projected to reach 58.0% of GDP by 2029, a level that raises concerns among fiscal conservatives but is defended by the government as necessary to secure growth.

Social welfare and demographic challenges

A significant share of the new budget will go toward tackling South Korea’s demographic crisis. The country has the lowest birthrate in the world, and the government plans to raise social welfare spending by 8.2% to $194.2 billion in 2026.

Much of this will fund programs designed to support families and encourage childbearing. Additional initiatives include housing support, childcare subsidies, and expanded healthcare benefits.

Cultural and industrial spending

Beyond welfare and research, cultural and industrial spending will also see increases. Funding for South Korea’s cultural industries, which have grown into a global phenomenon through music, film, and entertainment exports, will rise 8.8% to $6.9 billion.

The government expects the sector to continue its global expansion and sees it as a crucial soft power asset and contributor to economic growth.

Financing the deficit and bond issuance

To finance the widening deficit, the government plans to issue $167.2 billion in treasury bonds in 2026. Of that, the net increase in bonds is projected at $83.4 billion, with $79.2 billion specifically allocated to covering the fiscal shortfall.

The ceiling for dollar-denominated foreign exchange stabilization bonds will be set at $1.4 billion, alongside a limit of $9.9 billion for similar instruments issued in domestic currency.

Defense spending under US pressure

Defense expenditure will rise by 8.2% to $47.8 billion in 2026, equivalent to around 2.4% of GDP. The increase comes amid growing U.S. pressure on allies to boost defense budgets in response to regional security challenges.

South Korea’s military remains a central pillar of U.S. strategy in East Asia, and Washington has urged Seoul to take a larger role in its own defense. The new budget signals President Lee’s willingness to meet those demands, even as his government prioritizes AI and social welfare.

Balancing growth with fiscal risks

While President Lee’s administration argues that aggressive fiscal expansion is necessary to navigate economic headwinds and seize opportunities in AI, critics caution that rising debt and deficits could undermine long-term stability.

The contrast with the previous government is sharp. Under Yoon Suk Yeol, fiscal consolidation was a priority, with spending increases kept minimal. Lee’s policy marks a clear shift toward state-driven investment as the primary engine of growth.

For now, the administration is betting that strong investment in technology, research, and welfare will offset external shocks and lay the foundation for future competitiveness.

South Korea’s budget for 2026 represents both a bold bet on artificial intelligence and a broader commitment to state-led growth. Whether this strategy can overcome the dual challenges of trade pressure from the United States and demographic decline at home remains uncertain.