South Korea’s government on Friday unveiled its largest-ever budget increase, pledging to ramp up spending on technology and social programs to counter mounting economic headwinds from US tariffs, an aging population and weak corporate investment.
The Ministry of Economy and Finance proposed 728 trillion won ($524.2 billion) in spending for 2026, an 8.1% increase, or 54.7 trillion won, more than this year, marking the steepest rise in the nation’s history. That also compares with a 3.2% increase in 2025 and 2.8% the year before.
Finance Minister Koo Yoon-cheol, who also serves as deputy prime minister, called the plan a milestone not only for the next year but also for the next five years, saying it balances “investment and spending innovation” with fiscal discipline.
Asia’s fourth-largest economy is bracing for a confluence of pressures, including falling exports under heavy US tariffs and rising global protectionism, as well as a rapidly aging population driven by record-low birth rates and subdued corporate investment.
(Graphics by Daeun Lee) To offset these headwinds, the Lee administration is betting heavily on research and development, anchored by a nationwide artificial intelligence push that Lee pledged during his presidential campaign.
HEFTY SPENDING ON R&D AND AI
“It is time for fiscal policy to play an active role in tackling two challenges at once – driving industrial innovation through new technologies and reducing the economy’s dependence on exports,” Lee said on Friday at a cabinet meeting, where the budget plan was approved.
The overall R&D spending will rise 19.3% to 35.3 trillion won, reversing sharp cutbacks under the previous administration.
AI outlays alone will more than triple to 10.1 trillion won, with funds set aside for 150,000 graphics processing units (GPUs) and talent development.
“In an era of AI transformation, falling behind means forfeiting the future,” said Koo. “We will channel investment into areas that can lift our growth potential, strengthen fiscal soundness and create a virtuous cycle for the economy.”
Other major allocations include 269.1 trillion won for welfare, up 8.2%; 66.3 trillion won for national defense, up 8.2%; and 121.1 trillion won for general administration, up 9.4%.
Education spending will increase just 1.4% to 99.8 trillion won, reflecting the demographic decline, while agriculture and environment budgets will climb 7.7% each.
Finance Minister Koo Yoon-cheol gives a briefing on the 2026 budget proposal on Aug. 29, 2025 (Courtesy of Ministry of Economy and Finance) BALLOONING FISCAL DEFICIT
To finance the expansion, the government will cut or scrap about 27 trillion won in non-core national projects, the largest single-year restructuring on record, eliminating roughly 1,300 underperforming programs.
But officials acknowledged that revenue alone won’t be enough, requiring heavier reliance on debt sales.
The government plans to issue a record 232 trillion won in treasury bonds in 2026, with a net increase of 115.7 trillion won. About 110 trillion won in issuance will be used to cover the fiscal deficit.
The ceiling for foreign-exchange stabilization bonds will be set at $1.4 billion in US dollar debt and 13.7 trillion won in won-denominated securities.
The ministry projects the fiscal deficit widening to 4.0% of gross domestic product (GDP) in 2026 versus a 2.8% rise this year, as tax revenue is expected to add 3.5% to 674.2 trillion won. The debt-to-GDP ratio is forecast to rise to 51.6% from 49.1%.
The budget proposal will be submitted to the National Assembly, controlled by the ruling Democratic Party, for approval later this year.
Write to Yeong-Hyo Jeong, Ik-Hwan Kim and Jeong Min Nam at hugh@hankyung.com Sookyung Seo edited this article.
