Korea to stash chip tax windfall in new fund for AI, future tech

Korea plans to funnel an expected chip-driven tax windfall into a new “Future Fund,” with the government betting that a temporary revenue boom can bankroll its push for an edge in the global AI race and other strategic technologies.

The government expects the semiconductor frenzy to generate significantly more revenue than previously projected over the next several years. Rather than let the fortune flow into the regular budget, the government plans to create a separate fund to bank the cash for future investment.

The Ministry of Planning and Budget announced plans for the fund on Friday during the first meeting of its fiscal management strategy council. The announcement came along with a sweeping overhaul of the local education funding program.

With the Future Fund, if tax revenue in the following year exceeds the normal trend, the excess will be deposited into the fund. That benchmark will be based on the average annual growth rate of actual domestic tax revenue over the previous 10 years.

Some projections put the fund at more than 100 trillion won ($72 billion) in its first year. The government is expected to disclose a more precise figure when it unveils next year’s budget proposal.

The Budget Ministry introduced the idea of “windfall revenue” to describe unusually high tax revenue generated by major economic shifts, such as an industry supercycle — namely the semiconductor boom — that pushes tax receipts above long-term trends.

The new fund would mark a departure from the way unexpected revenue is normally handled.

When the government collects more tax than budgeted or spends less than planned, the money left over is classified as a budget surplus.

Under the National Finance Act, part of that surplus must first be settled through local allocation taxes and local education financing grants. Of what remains, 30 percent must first go toward the Public Capital Redemption Fund, which is used to repay debt incurred from government bailouts of financial institutions. Any money remaining can then be used to repay government debt or finance a supplementary budget.

The government says the expected chip windfall is simply too large to handle through the usual channels.

“As AI goes beyond a simple technological revolution and triggers a sweeping transformation of our economic and social systems, the resulting semiconductor boom is expected to sharply increase national tax revenue, including corporate tax revenue,” a Budget Ministry official said. “This fiscal capacity must serve as valuable ammunition in our bid to take the lead in the global race for AI supremacy.”

The government sees the next two to three years as a critical window to redesign overall national systems around the rapid spread of AI. Its priority, therefore, is investment rather than using the temporary windfall for short-term stimulus spending or focusing primarily on fiscal consolidation.

The Future Fund will be used for four areas seen as crucial to lifting Korea’s potential growth rate: the youth population, future growth engines, regional development and education.

“We will invest the funds in the three major AI megaprojects and seven future technologies — small modular reactors, nuclear fusion, renewable energy, quantum technology, aerospace, advanced biotechnology and advanced supply chains,” Budget Minister Park Hong-keun said during a press briefing after the meeting on Friday.

The fund is also designed to provide a buffer against sharp swings in tax revenue.

Korea has experienced extreme volatility in tax receipts since the early 2020s, partly due to the Covid-19 pandemic. Tax revenue exceeded projections by between 50 trillion won and 60 trillion won in both 2021 and 2022. However, in 2023 and 2024, the government collected 87 trillion won less than planned.

Higher tax revenue typically leads to higher spending. The problem comes when that spending becomes entrenched but the revenue disappears.

If the semiconductor-driven tax boom ends three or four years from now, the government could find itself struggling to sustain spending that expanded alongside it. Officials believe putting some of the windfall aside now would give the government a reserve it can tap when tax receipts fall short in the future.

But the decision to create a separate fund is likely to draw criticism that the government is effectively creating a discretionary pot of money for the current administration.

The fund’s annual spending plan will still face National Assembly review. But the government can adjust roughly 20 to 30 percent of major expenditures without submitting the changes to lawmakers. That loophole could give the government spending power comparable to a supplementary budget without parliamentary approval.

The plan has also drawn criticism concerning the national debt. Korea’s national debt continues to rise, yet the government has shown little intention of using even part of the unusually large tax windfall to pay it down.

Others see merit in the plan.

“If the current system stays in place, a large share of the hundreds of trillions of won in additional tax revenue would immediately flow to local governments,” a university professor who requested anonymity said. “The government likely took into account concerns that local governments could spend the money on one-off projects or cash handouts.”

The professor also pointed to the unusual source — and timing — of the windfall.

“This is money that came from an unexpected opportunity — the semiconductor boom — and it comes at a critical time,” the professor said. “The government should take responsibility for putting it to the right use. In that sense, I think it has found a clever solution.”

The government is also moving ahead with a major overhaul of local education funding, an issue that has long pitted fiscal authorities against the education sector.

The current system, introduced in 1972, automatically links education grants to domestic tax revenue. The government plans to scrap that formula and replace it with one based on nominal economic growth and changes in the school-age population.

Specifically, the grant will be calculated based on the previous year’s allocation, adjusted for the three-year average annual nominal growth rate and 35 percent of the three-year average annual rate of change in the school-age population.

Currently, the central government sets aside 20.79 percent of domestic tax revenue, along with a portion of education tax revenue, and distributes the money among the country’s 17 metropolitan and provincial education offices.

That means education funding automatically rises when tax revenue increases.

The system has come under growing pressure for reform because education grants have continued to climb alongside economic growth and tax revenue even as the number of students has fallen sharply due to a plummeting birth rate.

Notably, education grants surged 64 percent from 43.16 trillion won in 2016 to 70.75 trillion won in 2025, while the number of elementary, middle and high school students fell from 6.62 million to 5.53 million in the same period.

The government argues that the overhaul will not result in an outright reduction in education funding for local governments, with plans to guarantee that any decline from the previous year’s grant will be offset by writing it into a law.

Under the government’s medium-term projections, education grants that had been expected to reach 85.9 trillion won in 2029 would instead reach 90.1 trillion won under the new system, an increase of about 4.2 trillion won. Funding per school-age child would also rise from 11.9 million won in 2025 to 19.5 million won in 2030.

The catch is that grants could still grow more slowly than they would under the current system.

To make up the difference, the government plans to create a separate education account within the future response fund. Whenever grants calculated under the new formula fall below what schools would have received under the existing tax-linked system, the difference would be placed in that account.

The education account will reportedly mainly fund early childhood education, higher education and lifelong learning. The government says these areas have historically received insufficient financial support.

Local education offices are likely to oppose the change. The proposed changes could also face a tough fight in the National Assembly.

The government will keep the current local allocation rate at 19.24 percent of domestic tax revenue. Under the current system, higher tax revenue automatically means more money for local governments. However, under the new system, the government will first put part of the extra tax revenue into the Future Response Fund. Local governments will not receive a share of the money placed in the fund.

“Despite the adjustment to local allocation taxes and the overhaul of education grants, financial support for local governments and education will never decrease,” Budget Minister Park said. “If local governments or education authorities face a sharp deterioration in their finances, the central government will step in to provide support.”

BY JANG WON-SEOK [[email protected]]