[Lee Administration's First Budget] Next Year's Budget Set at 728 Trillion Won... Major Shift to Expansionary Fiscal Policy

Lee Administration Finalizes First Budget Proposal
8.1% Increase Over This Year, Marking Expansionary Stance
27 Trillion Won Cut from Unnecessary Spending
Budget Growth Rate Set at 5.5% Over Next Four Years

On the afternoon of the 28th, Koo Yoonchul, Deputy Prime Minister for Economy and Minister of Strategy and Finance, is speaking at the detailed briefing on the '2026 Budget Proposal' held at the Central Hall of the Government Sejong Complex. From left to right: Ahn Sangyeol, Fiscal Management Officer; Lim Kigun, Second Vice Minister; Deputy Prime Minister Koo; Yoo Byungseo, Budget Director. (Source: Ministry of Strategy and Finance)

The first budget of the Lee Jaemyung administration has been set at 728 trillion won. This represents an 8.1% increase from this year’s main budget, significantly expanding the rate of budget growth compared to the 3.5% average under the Yoon Sukyeol administration, and officially signaling a shift toward expansionary fiscal policy. As this is the first year to implement the Lee administration’s economic paradigm-aimed at overcoming low growth through focused investment in future growth engines such as artificial intelligence (AI)-the research and development (R&D) budget has been increased to a record high. However, there are concerns that fiscal soundness could deteriorate significantly, as the government is resorting to borrowing and increased spending at a time when the revenue base is weakening and fiscal resources are tight.

On the 29th, during a Cabinet meeting held at the Seoul Government Complex, the government finalized the "2026 Budget Proposal" and decided to submit it to the National Assembly on September 3. The government set next year’s budget (total expenditure) at 728 trillion won, which is an 8.1% increase from this year’s main budget of 673.3 trillion won, marking the first time the budget exceeds 700 trillion won. The year-on-year increase in total expenditure is the highest in three years, far surpassing both the government’s projected nominal growth rate for next year (3.9%) and the mid-term fiscal plan’s suggested growth rate (4.2%). This means the government intends to expand fiscal spending at a pace faster than the rate of economic growth.

President Lee Jaemyung stated at the extraordinary Cabinet meeting that “Now is a time when the proactive role of fiscal policy is more necessary than ever. We cannot make the mistake of leaving the field fallow just because we lack seeds to sow. It is common sense and natural to borrow seeds if necessary and prepare for farming.”

However, when based on the second supplementary budget, which included a 10.3 trillion won downward revision in revenue, the total expenditure growth rate is only 3.5%. This falls short of both the nominal growth rate and the mid-term fiscal plan’s projected increase. Some analysts interpret this as a sign that, despite maintaining an expansionary fiscal stance on a weak revenue base, the government is determined not to excessively increase spending and thereby sharply widen the fiscal deficit. In fact, the government has set the target for the average annual increase in total expenditure over the next four years, through 2029, at a much lower 5.5%.

Koo Yoonchul, Deputy Prime Minister for Economic Affairs and Minister of Economy and Finance, stated at a briefing held the previous day, “Due to the previous administration’s tax cut policies and the economic slowdown, the tax revenue base has significantly weakened, and much of the fiscal capacity to respond to economic cycles has been depleted. To overcome this situation, what is needed is not simply expansionary fiscal management, but strategic fiscal management.”

Amid tight fiscal conditions, the government secured 27 trillion won in fiscal resources by restructuring spending across 1,300 projects. Under the Yoon Sukyeol administration, annual spending restructuring amounted to 23-24 trillion won. Yoo Byungseo, Budget Director at the Ministry of Economy and Finance, explained, “The spending restructuring carried out in the process of preparing this budget proposal is the largest ever. We achieved savings not just through simple cuts but by reorganizing entire projects.” The government sharply reduced the Official Development Assistance (ODA) budget, which had increased excessively (by 39.2%) last year, and cut 410.3 billion won from local education grant funds by restructuring the allocation of education taxes. Annual event and promotional expenses were reduced by 50 billion won, and mining area support funds by 118.6 billion won.

In line with the goal of using fiscal policy as a catalyst for growth, the R&D budget was significantly increased. Not only did the government correct the reductions made under the Yoon administration, but it also added 5.7 trillion won, setting a record-high R&D budget of 35.3 trillion won-a 19.3% increase from the previous year. The expanded budget will be focused on nurturing future growth engines, including the transition to becoming one of the top three global AI powers (10.1 trillion won), as well as core technologies in six major advanced industries-bio, content, defense, energy, and manufacturing (10.6 trillion won). It will also be invested in key Lee administration policy projects such as K-Boom Up (3.2 trillion won), support for issuing 24 trillion won in regional gift certificates (1.2 trillion won), and raising the eligible age for child benefits (2.05 trillion won).

The Lee Jaemyung administration, which advocates for technology-driven growth, plans to increase fiscal spending and accept deficits during its term. As a result, the managed fiscal deficit, which stands at 73 trillion won this year, will rise to 109 trillion won next year and 124.9 trillion won by 2029. The ratio of the managed fiscal deficit to GDP will also reach 4.0%, exceeding the fiscal rule that aims to keep the deficit below 3% of GDP.