South Korea’s government announced its 2026 budget plan on Friday, pledging a major increase in spending aimed at driving economic growth through artificial intelligence investment. The budget will rise 8.1% to 728 trillion won ($524.4 billion), the fastest expansion since 2022, according to the Ministry of Finance. President Lee Jae Myung, who took office in June, has promised a shift from the fiscal restraint of his predecessor, embracing expansionary policy despite growing challenges from higher U.S. tariffs and demographic pressures.

Record AI And Industry Investments

The government said research spending will increase by a record 19.3% to 35.3 trillion won, with artificial intelligence designated as a top policy priority. Industrial policy spending will also climb 14.7% to 32.3 trillion won to support exporters affected by tariff hikes. The cultural sector, which has seen global success in recent years, will receive a boost of 8.8% to 9.6 trillion won. Finance Minister Koo Yun-cheol said fiscal policy should “prime the pump to grow the spark of recovery,” emphasizing AI as central to long-term competitiveness.

Fiscal Deficit And Welfare Commitments

South Korea’s fiscal deficit is projected to widen to 4% of GDP in 2026, compared with 2.8% this year, as tax revenue is expected to rise only 3.5%. The debt-to-GDP ratio will grow from 48.1% to 51.6% next year, with forecasts of 58% by 2029. Spending on social welfare will climb 8.2% to 269.1 trillion won, with projects targeting the world’s lowest birthrate. Defense spending, under pressure from Washington, will also rise 8.2% to 66.3 trillion won, equivalent to 2.4% of GDP. The government plans to issue 232 trillion won in treasury bonds to finance the deficit, while also setting limits on foreign exchange stabilization bonds.