As nations across the globe grapple with a surge in borrowing costs, almost none enjoy the option now being eyed in South Korea: deploying a major new source of cash to simply cut back on selling debt.

Asia’s fourth-largest economy has already outlined plans to establish a Future Response Fund, using part of the nation’s extraordinary surge in tax revenue stemming from the artificial intelligence boom. Now, one of the country’s top policymakers is leaving open the possibility of reducing government borrowing in the event of bond markets coming under pressure.

Park Hong Keun, South Korea’s planning and budget minister, said in an interview with Bloomberg that the government could consider using the fund to further reduce bond issuance if yields surge or market conditions deteriorate.

While debate in France and the US is centered around different types of intervention in their bond markets, in Seoul, officials are already able to trim borrowing thanks to the revenue surge from South Korean semiconductor production.

For now, South Korea is sticking with a planned 12.5 trillion won ($9.5 billion) reduction in debt issuance next year, Park said. But if needed, the reserve fund is a resource, he indicated.

“It would be better to view the fund as a stabilization mechanism — a fiscal dam — for a future period beyond next year should tax revenues come in below expectations,” Park said. He also said the government intends for the fund to continue beyond the current administration.

The surge in tax revenue comes as the chip boom pushes South Korea toward its first year of more than $1 trillion in exports. Bank of Korea Governor Shin Hyun Song said last week growth this year and next would substantially exceed the bank’s previous forecasts.

For Seoul, the challenge is how to turn a surge in earnings and tax receipts into lasting economic gains — without locking in spending that may prove hard to sustain.

Park said using all the windfall to repay debt now would carry risks of its own. If revenue subsequently weakens, the government could have to borrow again, potentially at higher interest rates.

Park was a key architect for the new fund, which is expected to receive 162.3 trillion won next year amid the AI spending surge that’s propelled demand for chips from Samsung Electronics Co. and SK Hynix Inc. Roughly two-thirds would remain in reserves after financing key policy priorities and reducing net bond issuance.

The numbers for the future fund could grow. The government has yet to decide what to do with about 51 trillion won in additional domestic tax revenue expected this year, after using part of the windfall to reduce October bond issuance. That money could go into the fund, be used to reduce government debt or be allocated through existing year-end accounting procedures, Park said.

The government plans to sell about 223 trillion won of bonds, slightly less than this year. Net issuance — the amount that adds to outstanding debt — would fall to 96.3 trillion won, helped by 12.5 trillion won from the new fund.

Read Also: Korea Plans Near-Record Bond Issuance to Fund 2027 Spending Another question for the future fund is how its reserves will be invested. “Naturally, we’ll need diversification across risky and safe assets; long-, medium- and short-term investments; overseas and domestic assets; and equities and bonds,” Park said.

Park said the government wants to earn more than it pays to borrow, though returns are secondary to the fund’s roles in protecting public finances and supporting growth.

The government’s average borrowing rate rose to 4.25% in September from 4.1% a month earlier. The BOK raised its benchmark interest rate at back-to-back meetings in July and August to contain inflation, which remains above its 2% target.

Park said investments could focus more on the short-to-medium term. Very short-term products such as money market funds may earn less than the government’s borrowing costs, while investments stretching over decades could make it harder to access money when needed.

Officials will also need to decide whether to use an existing investment pool for public funds or appoint a separate professional asset manager, Park said.

The establishment of the fund accompanies South Korea’s largest-ever spending plan, which would raise expenditure by 12.8% next year. Its planned outlays for young people, new growth industries, regional development and education are already included in that budget.

The government in September raised its forecast for this year’s national tax revenue to a record 478.6 trillion won. Semiconductor profits, special dividends and stronger stock trading have helped lift collections.

Park argued that keeping public finances healthy requires investment that generates growth and, in turn, the tax revenue needed to support future priorities. “Fiscal sustainability is not achieved merely by paying off debt and cutting expenditure,” he said.