The Lee Jae-myung administration finalized the 2026 budget plan, which amounts to 728 trillion won, increasing total expenditure by 8.1% compared to this year, at the Cabinet meeting on the 29th. The expenditure growth rate of the budget plan for next year significantly exceeds the average annual expenditure growth rate (3.5%) of the previous administration. This reflects the administration's 'fiscal philosophy' of expanding the role of fiscal policy to stimulate the economy amid a prolonged period of low growth.
Experts viewed that crafting an 'expansionary fiscal budget' to stimulate the economy and enhance potential growth rates was an 'inevitable choice.' They particularly assessed that securing advanced industrial technologies, including artificial intelligence (AI), will serve as a growth opportunity for the Korean economy.
However, they noted that relatively low investment in areas capable of quickly stimulating the economy, such as social overhead capital (SOC), is a weakness.
There are also threats. The government has invested large amounts of funds in research and development (R&D), but if clear results do not emerge, this will indicate a failure of investment. Moreover, if the surging government debt leads to increased fiscal instability, a decline in external creditworthiness is inevitable.
◇ "When the economy is bad, we must loosen our fiscal policy"… Positive evaluation of 'expansionary fiscal policy'
Economic experts generally agreed with the government's diagnosis that now is the time to loosen fiscal policy given the current economic situation in Korea. They evaluated that expanding investments in technology sectors, rather than temporarily increasing cash aid to boost consumption, is more beneficial from a long-term perspective.
Professor Kim Sang-bong from Hansung University said, "It is right to loosen fiscal policy when the economy is bad," adding, "However, fiscal expenditure for temporary consumption does not help. We should invest in technology and workforce." He noted that "for this government's fiscal policy to be effective, investments from private corporations must also be made."
Professor Lee Jeong-hee from Chung-Ang University stated, "When fiscal expenditure is needed, it must be used for the economy to recover," and added, "Worrying about government debt and not spending when it's time to spend is inappropriate."
Professor Kim Jin-il from Korea University noted, "The production, consumption, and investment indicators released today showed good results. To maintain this momentum, we need to establish a budget as we did this time," emphasizing that "the role of fiscal policy is directly linked to consumer sentiment."
◇ Will large-scale investment in technological innovation be an 'opportunity' for the Korean economy?
"We will restore our growth potential through technological innovation and create a structure in which the economy grows and tax revenue increases based on this."
As Deputy Minister Koo Yoon-chul declared, it would be the best outcome if the Korean economy progresses. The key factor is the results. Experts have suggested that careful management is necessary to harness the 'opportunity factor' of technological leaps.
Professor Ahn Dong-hyeon from Seoul National University stated, "The government has included more 'strategic nurturing intentions' in next year's budget than 'economic response intentions.' It's about nurturing AI as a strategic industry to enhance potential growth rates, and the key is to do it 'well.'"
Professor Ahn emphasized, "Currently, all of Korea's leading industries are declining. The petrochemical sector is a prime example," and pointed out that "the government's direction to discover new growth engines is good, but we need to be aware that if we exhaust all available fiscal resources and fail, it will be a big issue."
Professor Kim Jeong-sik, an emeritus professor at Yonsei University, stated, "If substantial investment is made in AI and new industry R&D, which the government has identified as key growth drivers, it will significantly aid national growth," but he also pointed out, "The problem is that while implementing fiscal policies to encourage corporate investment, the government is also pushing amendments to commercial laws that tighten corporate investments." He stated, "If these two are combined, their effects will be neutralized, leading to a 'neutral fiscal policy.' Therefore, policies should consistently focus on enhancing growth rates."
Professor Kim Jin-il remarked, "Focusing investment on R&D could lead to moral hazard," and added, "We must thoroughly monitor to prevent such side effects from arising."
◇ Focus on AI investment… No short-term domestic stimulus plan in sight
Concentrating investment in AI and new industry R&D is both a strength and a weakness, as investment in sectors other than new industries has relatively decreased.
Lee Sang-min, the head researcher at the Korea Institute of Public Finance, noted, "Next year's budget is characterized by 'high risk, high return.' The decision was made to invest limited resources in AI R&D, and it seems that the government has judged this to be the right time for concentrated investment." He added, "While one cannot oppose the policy decision itself, it should be pointed out that it is indeed a quite scary decision." He further remarked, "We must observe the (investment) results and that a great deal of public monitoring is needed to ensure success."
Concerns have been raised that investment in the SOC sector is not prominent in next year's budget. Recently, the decline in construction investment has been mentioned as the primary downward factor in Korea's economic growth rate. Considering this situation, it is posited that investment in construction and infrastructure should have been increased.
Professor Kim Jeong-sik stated, "To stimulate domestic demand through fiscal expenditure, spending must be expanded in areas with significant ripple effects. Construction is a prime representative of a sector with substantial ripple effects," adding, "When the construction market recovers, domestic demand will quickly revive, leading to a virtuous cycle of increased job opportunities and tax revenue."
Professor Kim Jin-il noted, "Fiscal input in the SOC and environmental sectors contributes to the recovery of the construction market. Particularly, investment in the environmental sector will have long-term impacts," adding, "It appears that the policy decision has been made to postpone increasing investments in the construction sector by 2 to 3 years."
◇ "An annual fiscal deficit of 120 trillion" "Concerns over declining external creditworthiness"
The expansionary fiscal budget for next year is expected to threaten the fiscal soundness of the Korean economy. In a situation where the tax revenue base is weak, a rapid increase in expenditure can only lead to an increase in government debt, which will ultimately result in deteriorating fiscal soundness.
Experts emphasized the need for vigilance regarding the structure of deficit financing. They argue that fiscal expenditure structures should be adjusted more strongly, or measures to expand total revenue should be devised to reduce the scale of financial deficits.
Professor Kim Woo-chul from the University of Seoul stated, "Considering that this is a progressive government, it was already anticipated that expansionary fiscal policies would be pursued," but he added, "However, I did not expect the scale of the fiscal deficit to grow to this extent." Professor Kim noted, "From next year until 2029, an annual fiscal deficit of 120 trillion won is expected. This indicates a willingness to tolerate a structural fiscal deficit situation," pointing out that "the increase in government debt may lead to a downgrade in national creditworthiness and prepare for macroeconomic shocks due to this."
Deputy Minister Joo Won of the Korea Economic Research Institute criticized, "The pace of government debt increase is too fast." Deputy Minister Joo stated, "Developed countries have a government debt ratio of 60-70% compared to their gross domestic product (GDP), so it's not correct to say that 'we are at a low level.' These countries are reserve currency nations, but we are not," adding that "external creditworthiness could rapidly decline."
Professor Kim Sang-bong also stated, "Fiscal soundness is not good," and recommended, "We must manage the fiscal deficit ratio to be within 3% based on the consolidated fiscal balance without social security fund." Professor Woo Seok-jin from Myongji University noted, "A long-term plan to manage government debt is necessary," stating that "countermeasures must be devised from the revenue side, such as expanding the revenue base."