In the AI Era, GDP Rises but Jobs Decline: "A Major Shift in Fiscal Policy Is Inevitable"

Prepare for Discussions on AI Profit Redistribution
Pursue Expansionary Fiscal Policy and Manageable Debt Levels
Avoid Excessive National Debt Cases Seen in Japan and the US
"Innovation Needed to Shift Fiscal Vested Interests"

There are projections that as artificial intelligence (AI) replaces human labor, the number of jobs will decrease while gross domestic product (GDP) will increase. Experts say that as the fiscal base shifts from labor income to AI profits, a transition in fiscal policy is needed to prepare for this change. They also advise that it is necessary to innovate the fiscal vested interest structure to enable demand-based spending, as well as to provide fiscal support and expansionary fiscal measures to secure AI competitiveness.

Job seekers participating in the 'Gyeonggi-do 5070 Job Fair' held last month at KINTEX in Goyang, Gyeonggi-do, are looking at the recruitment bulletin board.

The Korea Institute of Public Finance recently published the October 2025 issue (No. 352) of its “Fiscal Forum,” which includes a report titled “The Inevitable Paradigm Shift in Fiscal Policy and the Increasing Role of Government Finance in the Era of Artificial General Intelligence (AGI).” The report examines what role fiscal policy should play as forecasts predict a decline in jobs due to the spread of AI.

From an economic perspective, it is still uncertain how the impact of AI on GDP and employment will materialize. To explore this, the report highlights a paper by Anton Korinek, a leading scholar in AI economics at the University of Virginia, published last year by the National Bureau of Economic Research (NBER).

In his paper, Professor Korinek analyzed the impact of AI development on GDP and jobs through three scenarios. The first scenario assumes that while tasks are automated in the AI era, new tasks continue to emerge. The second scenario assumes that the distribution of tasks is finite and complete automation is achieved within 20 years. The third scenario assumes a much more limited distribution of tasks, with complete automation occurring within five years.

If the first scenario unfolds, productivity will increase due to AI, resulting in more new jobs and continuously rising wages. The report assesses that if labor income and GDP rise sharply due to AGI, and South Korea’s GDP growth rate climbs into the 3% range despite a declining population, concerns about fiscal sustainability would be significantly reduced.

If the second scenario becomes reality, jobs will disappear after 20 years, and the tax bases for income tax and social insurance (such as the National Pension and health insurance) will also vanish. However, if GDP increases significantly due to AI development, the tax base will also increase, and the fiscal policy base will shift from labor income to corporate AI profits. In this case, rather than increasing the population, fiscal policies to improve the quality of life for the population will also be necessary.

Kim Junghoon, President of the Fiscal Policy Research Institute and author of the report, stated, “Ultimately, if the advancement of AGI leads to a utopia where both wages and GDP increase simultaneously, there is no problem. However, if we face an unprecedented situation where jobs disappear and only GDP increases, a major paradigm shift in fiscal policy is inevitable.” He also noted the need to establish policy pathways in anticipation of a time when GDP is high but labor income declines, prompting discussions on the redistribution of AI profits.

The report suggests that South Korea’s fiscal policy direction for the next 20 years should be set in three ways. First, proactive fiscal support to secure competitiveness in anticipation of intensified AI technology competition. Second, expansionary fiscal policy and a certain level of national debt increase to prepare for insufficient aggregate demand and the possibility of long-term stagnation due to population aging. Third, avoiding the cases of excessive national debt seen in countries like Japan, the United States, and France.

President Kim emphasized, “It is necessary to innovate fiscal vested interests by shifting spending to a demand-based approach,” and pointed out, “As in Japan, South Korea has an excessively high proportion of spending that is unconditionally guaranteed by the ratio of national tax revenue, such as local allocation tax and local education grant.” He further stressed, “South Korea must respond to its structural economic downturn with expansionary government fiscal policy while innovating the structure of fiscal vested interests.”