Chip-fueled budget should pay down debt

The government has finalized an 820.9 trillion won ($598 billion) budget for next year, buoyed by the semiconductor boom. Spending is up 12.8 percent, or 93 trillion won, from this year’s original budget, an unprecedented expansion. Outlays will rise sharply for three so-called megaprojects, including a semiconductor complex in the southwestern region, as well as research and development, youth employment and defense.

The government expects total revenue to surge 30.4 percent, or 205.6 trillion won, to 880.8 trillion won as corporate and income tax receipts increase. That windfall underpins the spending spree. The question is how long the semiconductor boom will last.

Gray rhinos capable of shaking Korea’s economy lurk across the global landscape. Warnings are already growing that the chip cycle may be approaching a peak. Big Tech companies building AI data centers are borrowing heavily through corporate bonds and other financing. Meanwhile, a U.S. national debt exceeding $40 trillion is adding to global financial uncertainty.

If persistent inflation forces the Federal Reserve to raise interest rates further, Korea could face an economic shock comparable to the 2008 global financial crisis or the southern European debt crisis of 2010.

That makes a strong fiscal buffer all the more necessary. With more than 100 trillion won in corporate tax revenue expected from semiconductor companies alone, the government plans to establish a 162.3 trillion won Future Response Fund. Of that, 45.4 trillion won will be incorporated into budget spending and 12.5 trillion won used to reduce new government bond issuance. The remainder, 104.4 trillion won, will be held in reserve.

The danger is that this enormous reserve could become a discretionary purse that the administration taps whenever politically convenient.

The government expects expansionary fiscal policy to lift potential growth and ease polarization. Yet behind those ambitions are wasteful and one-off expenditures, including the addition of 3,851 government employees and various cash benefits.

Officials say spending restructuring worth about 100 trillion won and faster growth will reduce the national debt-to-GDP ratio from 51.6 percent to 48.3 percent. But spending, once increased, is notoriously difficult to reverse. Revenue generated by a cyclical industry should not be treated as if it were a permanent addition to the government’s tax base. A downturn could quickly expose the fiscal risks created by recurring commitments.

During its budget deliberations, the National Assembly should require that a substantial portion of the Future Response Fund’s reserves be used to repay national debt. The time to prepare for a crisis is when the government still has flexibility and room to maneuver.