South Korean President Lee Jae Myung is warning that higher interest rates have become difficult to avoid as his government simultaneously prepares the largest spending increase in the country’s history in an effort to strengthen economic growth and secure South Korea’s position in the global artificial-intelligence race.
Lee made the comments Tuesday during a Cabinet meeting focused on the government’s proposed 2027 budget, arguing that monetary tightening creates its own economic risks even if higher rates are necessary.
He said South Korea has reached a point where rising interest rates cannot realistically be avoided, while acknowledging that higher borrowing costs can weaken the economy’s growth potential and place disproportionate pressure on financially vulnerable households.
The president argued that fiscal policy will therefore need to play a carefully targeted role, helping reduce the burden on people most exposed to higher borrowing costs without undermining the country’s longer-term economic prospects.
Lee described South Korea as standing at an important economic crossroads between allowing low growth to become entrenched and creating conditions for a rebound in the country’s potential growth rate.
That concern is central to the government’s 2027 spending plan.
South Korea is proposing total government expenditure of approximately 820.9 trillion won, or about $597 billion, next year.
The plan represents a 12.8% increase from the 2026 budget and would amount to the largest annual percentage increase in government spending on record.
It also represents a clear shift in economic policy under Lee.
Since taking office in June 2025, Lee has favored a more expansionary approach to fiscal policy, moving away from the tighter spending policies followed during the previous administration.
His government is betting that aggressive public investment can help increase South Korea’s productive capacity rather than simply provide short-term economic stimulus.
A major factor making the spending expansion possible is an extraordinary increase in government revenue tied to South Korea’s booming semiconductor industry.
Samsung Electronics and SK Hynix have generated exceptionally strong profits as global demand for advanced memory chips has accelerated alongside investment in artificial intelligence.
High-bandwidth memory, or HBM, has become particularly important because the chips are widely used in advanced AI computing systems.
The strength of the semiconductor industry has substantially increased corporate-tax receipts flowing to the government.
South Korea expects total tax revenue to rise approximately 40.7% in 2027 to 584.4 trillion won.
Corporate-tax revenue alone is expected to more than double, reaching approximately 216.7 trillion won.
Overall government revenue is projected at about 880.8 trillion won.
Rather than using the entire tax windfall for ordinary spending, the government intends to direct a significant portion of the additional revenue toward long-term investment while also reducing its dependence on new borrowing.
One of the centerpieces of the strategy is a newly created Future Response Fund.
The government expects to direct approximately 162.3 trillion won of excess tax revenue into the fund rather than spending the money immediately on short-term programs.
Approximately 45.4 trillion won from the fund is expected to be deployed during 2027.
The money will support areas including programs for young people, emerging industries, future growth technologies and specialized education.
The government sees the fund as a way to convert the semiconductor-driven tax windfall into investments that could continue supporting the economy even if the current chip boom eventually slows.
Artificial intelligence and advanced semiconductor infrastructure will be among the biggest priorities.
South Korea plans to spend approximately 21.3 trillion won on infrastructure supporting the semiconductor industry, including industrial water systems, electricity networks and logistics.
Reliable electricity and water supplies have become increasingly important because advanced semiconductor manufacturing requires enormous amounts of both resources.
The government also plans a separate semiconductor-focused budget of approximately 2.6 trillion won.
The investments are designed to reinforce South Korea’s position as one of the most important countries in the global chip supply chain while competition intensifies between the United States, China and other major economies.
Lee said the world is passing through a major transformation in its industrial structure as several forces converge at the same time.
Those forces include the rapid development of artificial intelligence, a global transition in energy systems and the continuing reorganization of international supply chains.
The president argued that South Korea’s next budget must help the country establish advantages that will be difficult for competitors to overcome.
At the same time, he said the spending program needs to create improvements that ordinary citizens can actually experience.
The government says its priorities include developing future growth industries, expanding opportunities for younger Koreans, reducing economic polarization and strengthening the social safety net.
Lee has promoted what his administration describes as a productive fiscal cycle in which public investment increases economic growth and industrial competitiveness, generating additional revenue that can then support future government spending.
The administration also plans several major social and regional initiatives.
These include increased financial assistance for young adults, the development of new startup-oriented cities, additional public housing and broader basic-income support for farming and fishing communities.
Lee has said some young people could receive support worth as much as 200 million won over time under government programs.
The government is also targeting the creation of 10 startup cities and the supply of approximately 200,000 public housing units.
Another major portion of spending will go toward national security.
The 2027 proposal includes approximately 3.4 trillion won for strategic weapons programs, including development related to nuclear-powered submarines.
Despite the record increase in spending, South Korea expects its fiscal position to improve sharply because tax revenue is rising even faster.
The government estimates the national debt-to-GDP ratio will fall to approximately 48.3% next year.
That would represent a decline of 3.3 percentage points from the estimated 51.6% level in 2026.
The managed fiscal deficit is also expected to shrink significantly, reaching approximately 0.1% of gross domestic product.
The government intends to keep the managed fiscal deficit below 3% of GDP through 2030 while holding national debt in the upper-40% range relative to the size of the economy.
Officials estimate that South Korea’s debt ratio in 2030 could ultimately be more than 10 percentage points below the trajectory projected under the previous government’s fiscal plan.
The stronger revenue outlook will also allow the government to reduce bond issuance.
South Korea expects to sell approximately 222.8 trillion won of government bonds in 2027, down from 225.7 trillion won in the current year’s budget.
Net issuance, which represents the creation of additional sovereign debt rather than bonds used to refinance existing obligations, is expected to fall more substantially.
Net issuance is projected at approximately 96.3 trillion won next year, down 13.1 trillion won from about 109.4 trillion won in 2026.
Bond investors nevertheless reacted negatively after the budget announcement.
South Korea’s benchmark 10-year government bond yield climbed approximately 6.5 basis points to 4.378%.
The increase suggested traders had expected the government to cut planned bond issuance even more aggressively given the enormous increase in tax revenue.
The move also occurred as long-term government bonds around the world were experiencing a broader sell-off.
Analysts have argued that a larger reduction in bond supply would have been more supportive for South Korea’s debt market.
At the same time, the decline in net issuance was viewed positively, and adjustments that reduce the amount of long-term debt sold by the government could eventually help stabilize the bond market.
The budget debate is unfolding just days after the Bank of Korea raised interest rates again.
On August 27, the central bank increased its benchmark base rate by 0.25 percentage point, moving it from 2.75% to 3.00%.
It was South Korea’s second consecutive rate increase.
The Bank of Korea said the economy was expanding more strongly than previously expected, supported by exports and recovering domestic demand.
At the same time, inflation is expected to remain above the central bank’s target for an extended period.
Policymakers said preventive action was necessary to stop inflation pressures from spreading while also addressing financial-stability risks.
The combination of stronger economic growth, elevated inflation and financial risks has made monetary tightening more difficult to avoid, helping explain Lee’s warning that borrowing costs are likely to remain under upward pressure.
Higher interest rates present a particular challenge for South Korea because households carry substantial levels of debt.
Rising mortgage, credit and other borrowing costs can therefore quickly reduce disposable income.
Financially vulnerable borrowers can be affected especially severely, creating the tension Lee highlighted between the need to restrain inflation and the need to protect economic growth and household finances.
That tension helps explain why the government intends to use fiscal policy more actively even while the central bank tightens monetary policy.
Instead of attempting to offset higher interest rates across the entire economy, Lee is calling for more targeted fiscal support aimed at reducing the damage experienced by vulnerable groups while preserving investment in industries capable of increasing future economic growth.
The strategy also relies heavily on the assumption that South Korea’s semiconductor boom will continue generating substantial profits and government revenue.
Samsung Electronics and SK Hynix have become major beneficiaries of the global AI investment cycle, particularly because of demand for memory technology used in high-performance computing.
That boom has given the government considerably more fiscal flexibility than it would otherwise have.
However, semiconductor demand has historically been cyclical, meaning government finances could face renewed pressure if the industry eventually experiences a downturn.
For now, the Lee administration wants to use the current revenue surge to strengthen the country before that possibility emerges.
The president has called for lawmakers to contribute broadly to improving the budget rather than treating the proposal purely as a partisan political issue.
He said the government would respect additional proposals developed during the National Assembly’s review process and urged lawmakers to cooperate in creating a spending plan capable of giving people confidence that their economic circumstances can improve.
The proposed budget still requires parliamentary approval before it can take effect.
Lee’s political position may make passage easier because his party holds a majority in the National Assembly, although lawmakers can still modify the government’s proposal during the budget process.
The larger economic challenge will be balancing several objectives that increasingly point in different directions.
The Bank of Korea is trying to prevent inflation from becoming entrenched and limit financial instability through higher interest rates.
The government, meanwhile, wants to dramatically increase investment in artificial intelligence, semiconductor infrastructure, defense, young people and social programs while protecting heavily indebted households from the consequences of higher borrowing costs.
Strong semiconductor profits have temporarily made those goals easier to pursue simultaneously by producing an enormous increase in tax revenue.
Whether the strategy remains sustainable will depend heavily on the durability of the AI-driven chip boom, inflation trends, financial markets and the broader global economy.
For Lee, the stakes extend beyond managing the next business cycle.
His administration is attempting to use a rare period of exceptional government revenue to permanently raise South Korea’s economic potential.
The president’s warning about unavoidable interest-rate increases makes clear, however, that the country will be attempting that transformation while households, companies and financial markets adjust to a considerably more expensive borrowing environment.