🚨 2026 Budget Analysis
Today Korean Economic News for Beginners | 2025.10.07
0️⃣ Investing in New Tech and Rental Housing, Strategic Fiscal Choices
📌 Increasing AI, Basic Research, and SME Tech Development; Cutting ODA and Education—Selective Allocation in Expansionary Fiscal Policy
💬 The government's 2026 budget proposal shows a "selective focus" strategy by significantly increasing investments in artificial intelligence (AI), data industry, basic scientific research, and SME technology development, while expanding rental housing supply. On the other hand, it reduces budgets for Official Development Assistance (ODA) and some education sectors. While special activity funds appear to have decreased significantly, this is mainly due to reclassification into information security costs. The government secured funding by drastically cutting home purchase and sale loans. The government's intention to manage fiscal burden through capital expenditures and transfer payments while maintaining an expansionary fiscal stance is evident, but there are criticisms that the real nature of spending restructuring is unclear.
1️⃣ Easy to Understand
The government has announced how it will allocate spending for 2026. It increased budgets for AI and science technology, which are seen as future growth engines, and for rental housing to stabilize housing for ordinary people. However, it reduced spending on overseas aid and some education areas.
First, let me explain what a government budget is. A government budget is a plan for how much the country will spend and where it will spend it over one year. Just like a household divides monthly income into food, education, and savings, the government allocates tax money to various sectors like defense, welfare, education, and industry.
The most notable aspect of the 2026 budget proposal is "where more is spent and where cuts are made." The government has significantly increased budgets for new technology sectors like artificial intelligence and data industry. This is a preemptive investment based on the belief that AI technology like ChatGPT will be key to future economic growth.
The budget for basic science research was also increased. Basic science refers to research that reveals fundamental scientific principles, not immediately profitable applied research. Most Nobel Prize-winning research is in basic science, and such accumulated research is needed for innovative technologies to emerge later.
Support for SME technology development was also strengthened. Large corporations have their own R&D capacity, but many small and medium-sized enterprises do not. When the government helps their technology development, more competitive SMEs emerge, leading to job creation and economic vitality.
In the housing sector, the focus is on expanding rental housing supply. As jeonse and monthly rent prices continue to rise, ordinary people's housing burden has grown. The government aims to stabilize housing prices by increasing rental housing directly or through public institutions.
Some areas saw budget cuts. A representative example is the Official Development Assistance (ODA) budget. ODA is aid funding that Korea provides to help developing countries' development, and this budget decreased. Some education sector budgets were also reduced.
An interesting point is that while "special activity funds" appear to have decreased significantly, analysis shows this money was actually renamed as "information security costs." Special activity funds are money that government departments use for confidential work or intelligence activities, and this was reclassified under information security. In other words, it wasn't actually reduced—just the category changed.
Another notable point is that government loans for home purchase and sale were drastically reduced. The government had been lending money at low interest rates to people trying to buy homes, but decided to reduce this and focus on rental housing supply instead. This can be seen as a strategic shift from directly helping home buyers to lowering overall housing costs by increasing rental supply.
Experts point out that the government increased "capital expenditures." Capital expenditures are investments in public institutions or funds, which appear to involve immediate cash outflow but are calculated differently in fiscal health indicators. This suggests an intention to manage fiscal burden while pursuing expansionary fiscal policy.
In summary, the 2026 budget focuses on future growth engines and housing stability while tightening other areas and using accounting methods to adjust fiscal burden.
2️⃣ Economic Terms
📕 Reserve Fund
A reserve fund is an amount set aside in the budget that can be used for unexpected expenses.
- General reserve funds can be used at the government's discretion, offering high flexibility.
- Purpose-specific reserve funds can only be used for designated purposes like disasters or epidemics.
- Having more reserve funds is good for responding to emergencies, but too much can be criticized as inefficient fiscal management.
📕 Investment Funds
Investment funds are money the government puts into public institutions or funds as capital.
- Unlike regular expenditures, they are classified as capital expenditures and recorded as assets on financial statements.
- This affects fiscal health indicators like government debt ratios differently.
- If profitable, they can be recovered, but if investments fail, the burden falls on citizens.
📕 Official Development Assistance (ODA)
ODA is public funding provided by developed countries to help economic and social development of developing countries.
- Korea operates ODA for various policy goals including diplomatic and security objectives, global supply chain building, and humanitarian aid.
- The size of ODA becomes an indicator of Korea's status and role in the international community.
- While ODA size is adjusted according to fiscal capacity, continuous reduction can lead to decreased international credibility.
📕 Capital Expenditures
Capital expenditures are government spending on acquiring assets or making investments, with different accounting treatment from regular current expenditures.
- This includes investments in public institutions, equity acquisitions, and large-scale facility investments.
- While cash goes out immediately, it's recorded as an asset, so it affects indicators like managed fiscal balance favorably.
- Good investment performance can bring future returns, but failures become hidden fiscal risks.
3️⃣ Principles and Economic Outlook
✅ Background and Limitations of Selective Focus
Let's look at why the government focused budgets on specific areas and its limitations.
First, AI and new technology sectors are judged to be key to future competitiveness. With the entire world pouring massive resources into AI technology development, if Korea falls behind, overall industrial competitiveness could be shaken. Particularly, all major industries including semiconductors, automobiles, and manufacturing are entering a new phase as they combine with AI technology. The government increased investment in AI data industry and basic science research to respond preemptively to these changes. In fact, companies like Samsung Electronics and SK Hynix are also investing astronomical amounts in developing AI semiconductors.
Second, SME technology development support aims to enhance innovation capacity across the economic ecosystem. Korea's economy has been operated around a few large corporations, which is a structure vulnerable to economic shocks. When SMEs develop their own technological capabilities and competitiveness, a healthy industrial ecosystem emerges that's not dependent on large corporations. SMEs are also key to job creation. When the government supports R&D funding, SMEs can develop new products and services, leading to increased employment.
Third, however, the selective focus strategy has limitations. Cutting ODA and education budgets helps secure fiscal capacity in the short term, but may weaken Korea's international status and talent development capabilities in the long term. ODA is not just aid but also a means of diplomatic and security cooperation and global supply chain building. For example, supporting infrastructure in developing countries creates a foundation for Korean companies to enter, or establishes cooperative relationships for resource security. Education budget cuts may also negatively affect future talent development, requiring careful approach.
While the selective focus strategy can produce short-term results, unbalanced investment risks weakening the economy's fundamental strength in the medium to long term.
✅ Effects and Challenges of Rental Housing Expansion Policy
Let's analyze the meaning of the government's strategy to reduce home purchase support and focus on rental housing supply.
First, rental housing expansion has a direct effect on stabilizing jeonse and monthly rent prices. In recent years, jeonse and monthly rent prices have soared around Seoul and the metropolitan area, greatly increasing ordinary people's housing burden. Young people and newlyweds especially have difficulty buying homes due to rising housing prices and must rely on jeonse or monthly rent, but life is becoming harder as even these prices rise. When the government increases public rental housing, the rental supply in the market increases, suppressing jeonse and monthly rent price increases.
Second, cutting home purchase loans is also interpreted as a measure to prevent excessive household debt growth. The government has been lending money at low interest rates to help people without homes buy houses. However, this led to increased household debt, and when interest rates rise, the burden of loan interest increases, making household finances difficult. Considering these problems, the government appears to have shifted policy from direct support for home purchases to promoting housing stability by increasing rental housing supply.
Third, however, rental housing expansion policy also has challenges. Public rental housing requires enormous construction costs and continuous fiscal input for management and maintenance. Also, if rental housing concentrates in specific areas, stigma effects or regional segregation phenomena may occur. Therefore, detailed plans are needed for where and how to supply rental housing. There are also concerns that cutting home purchase loans may shrink the private construction market. The housing construction industry has many related industries, so if construction business worsens, it can lead to job losses.
While rental housing expansion helps stabilize housing for ordinary people, a balanced approach is needed that also considers fiscal burden and impact on the private market.
✅ Increase in Capital Expenditures and Fiscal Health
Let's look at the background of the government increasing capital expenditures and its impact on fiscal health.
First, capital expenditures are a way to manage fiscal indicators while pursuing expansionary fiscal policy. The government wants to increase spending for economic stimulus, but if indicators like fiscal deficits or national debt worsen, international credit ratings may fall or government bond interest rates may rise. In this situation, capital expenditures are an attractive option. Investing in public institutions or putting money into funds means cash goes out immediately, but this is recorded as an asset and is reflected less negatively in indicators like managed fiscal balance. For example, if you invest in Korea Housing Finance Corporation for rental housing projects, this is recorded as government assets.
Second, capital expenditures have the nature of long-term investment. While regular welfare or administrative expenses are spent and done, investments or capital can potentially generate future returns. For example, if the government invests in an AI startup fund, if successful companies emerge, stock values rise and the government can also profit. Also, investing in public infrastructure raises overall economic productivity, potentially bringing long-term tax revenue increases.
Third, however, capital expenditures also have hidden risks. If investments fail, losses directly become citizens' burden. In the past, there were many cases where public institutions or funds the government invested in became insolvent and eventually had to be covered with taxes. Also, as investment funds increase, proper management and supervision of those institutions or funds is needed, but if the government's management capacity is insufficient, it can lead to wasteful management or corruption. Therefore, when increasing capital expenditures, a system that thoroughly manages investment performance and discloses it transparently is essential.
While capital expenditures have advantages of managing fiscal indicators and long-term investment, without investment performance and management systems, they can become hidden fiscal risks.
✅ Future Outlook and National Assembly Review Process
Let's forecast what process the 2026 budget proposal will go through and what issues will arise.
First, there's a high possibility the budget will be significantly modified during National Assembly review. The budget proposal submitted by the government must go through National Assembly deliberation and approval to be finalized. The opposition party is expected to strongly oppose cuts to ODA and education budgets. Especially, arguments will emerge that education should not be reduced as it's investment for future generations. Even within the ruling party, there may be movements to increase budgets related to constituency issues. Eventually, through negotiations between ruling and opposition parties, some items will be increased and others decreased through adjustment.
Second, supplementary budgets may be needed depending on economic conditions. The 2026 budget proposal is based on current economic forecasts. However, if global economic recession deepens or the semiconductor industry becomes more difficult than expected, additional budget allocation may be needed for economic stimulus. Conversely, if the economy is better than expected, tax revenue may increase, creating fiscal capacity. Therefore, we must understand that budgets are not fixed but can be flexibly adjusted according to economic conditions.
Third, in the long term, balancing fiscal health and growth investment will be a key challenge. Korea's national debt continues to increase, and welfare spending due to aging is also rising rapidly. In this situation, finding balance between investment for future growth and maintaining fiscal health is not easy. The government tries to manage fiscal indicators through methods like capital expenditures or investment funds, but fundamentally, structural reforms like revenue expansion or spending efficiency are needed. For the next several years, fiscal policy sustainability is expected to become an important political and economic issue.
The 2026 budget proposal will be adjusted according to National Assembly review and economic changes, and in the long term, securing fiscal sustainability will be a key challenge.
4️⃣ In Conclusion
The 2026 budget proposal shows a "selective focus" strategy focused on future growth engines of AI and new technology, and housing stability for ordinary people. However, areas that build fundamental strength like education and international cooperation have been pushed back, and the burden of managing fiscal risks from increased capital expenditures remains a challenge.
The government's focus on AI and data industry, basic science research, and SME technology development is an appropriate decision. With the world entering AI technology competition, preemptive investment is essential for Korea to maintain competitiveness. Also, attempts to stabilize jeonse and monthly rent prices through rental housing expansion will help reduce ordinary people's housing burden.
However, cuts to ODA and education budgets are concerning. ODA is not just aid but also a means of diplomatic and security cooperation and global supply chain building. Education is long-term investment to develop future talent, and reducing it may ultimately lower our economy's potential growth rate.
The point that special activity fund reductions are actually just reclassifications to information security costs, and the analysis that funding was secured by cutting home purchase and sale loans, raises questions that the government's budget compilation is closer to accounting method adjustments than real restructuring.
While increased capital expenditures are a difficult measure to manage fiscal indicators while pursuing expansionary fiscal policy, if investment performance doesn't support it, it can return as future fiscal burden. Thorough monitoring and transparent disclosure are needed regarding whether investment funds or fund investments are properly managed and generating returns.
We must pay attention to how the budget will be adjusted during National Assembly review. Especially, through negotiations with the opposition party, there's a possibility that budgets for areas like education and ODA will be partially restored. Also, supplementary budgets may be needed depending on economic conditions, so we must keep in mind that budgets can continue to change.
Ultimately, successful fiscal management requires balance between growth investment and fiscal health, transparent performance management, and balanced investment from a long-term perspective. We must not make the mistake of weakening future growth foundations by being obsessed only with short-term fiscal indicator management.
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