South Korea unveils a historic $530 billion budget, funded by the surge in the AI chip industry.

      South Korea plans to implement a record budget expenditure exceeding 800 trillion won ($530.97 billion) for fiscal year 2027, buoyed by increased tax revenues from the thriving AI chip sector, the government announced on Monday. This marks a clear indication that Seoul intends to utilize the semiconductor revenue instead of saving it, a debate that has been ongoing since the introduction of a ‘future response fund’ based on chip tax revenues earlier this month.

      Budget Minister Park Hong-keun, during a national fiscal strategy meeting, indicated that the funding would come from elevated tax incomes and reductions in spending. The proposed budget contrasts with the current year’s expenditure plan of 727.9 trillion won, excluding additional budgets.

      Priority will be given to three "mega-projects" focused on chips, AI data centers, and physical AI. The government noted it would secure the necessary funding through a significant overhaul of existing programs instead of solely depending on the increased tax revenue, which presents a more prudent approach than the figures alone indicate.

      Park mentioned that the restructuring aims to cut approximately 50 trillion won in spending, double that of last year, through an assessment of discretionary and mandatory expenditures and reductions in underperforming programs. This aspect of the plan is likely to face pushback, as each underperforming program has its own supporters.

      President Lee Jae Myung emphasized that the government would leverage all available resources to ensure corporate investment stays on track. He remarked, “The additional tax revenue available now is a valuable resource to be utilized at a crucial moment when global AI leadership is at stake.”

      The financial boost is substantial and concentrated. Combined operating profits for Samsung Electronics and SK Hynix are anticipated to surpass 600 trillion won this year, rising from approximately 90 trillion won the previous year, and semiconductors are taking an increasing share of national exports.

      Seoul has already allocated $880 billion for chips, data centers, and robotics over the upcoming decade within the same mega-project framework. The 2027 budget signifies the first yearly allocation that must be based on actual tax receipts, rather than mere promises.

      It also represents a significant enhancement of the government’s earlier projections. According to fiscal guidelines approved by the Cabinet in March, the spending estimate for 2027 was initially set at 764.4 trillion won, with officials previously stating that it could reach about 800 trillion won only if tax revenues improved and the expansionary approach remained in place. Both of these conditions have been fulfilled due to the chip cycle.

      The Future Response Fund now has a more defined outline, at least theoretically. It is designed to function as a strategic investment platform, reserving tax revenue that exceeds long-term trends and channeling it into four areas: youth, growth engines, regions, and talent.

      However, the government did not specify the size of the fund, its launch date, or how “long-term trends” in tax revenue will be determined. These details are crucial in deciding whether it will serve as an endowment or merely an accounting item.

      Writing a budget based on cyclical profits is a gamble that the cycle will persist. The memory sector has faced downturns before, and the profits supporting this plan stem from two companies capitalizing on a single surge in AI infrastructure investment.

      The current boom is also beginning to disrupt the local economy, as the chip rally exerts pressure on Korea’s bond market, with record chip bonuses being flagged by economists as a potential inflation concern. An expansionary budget amid this scenario is a choice rather than a neutral decision.

      The complete 2027 budget draft will be released later this year, when the restructuring goals transition from a headline figure to specific programs. That will be the phase where the 50 trillion won cuts will be scrutinized.