South Korea will sharply increase its military budget for 2016 to enhance the readiness of its armed forces against North Korean threats, the top economic policymaker said Thursday.

In a meeting with lawmakers from the ruling Saenuri Party in Seoul, Finance Minister Choi Kyung-hwan said the latest standoff with North Korea highlights the need to strengthen the combat readiness of troops near the demilitarized zone that separates the two Koreas, as well as to cope with the threat posed by Pyongyang's submarines.

Following a land-mine explosion that maimed two Korean soldiers earlier in the month, and a subsequent exchange of artillery fire on Aug. 20, the two sides squared off across the heavily armed border with their militaries placed on the highest alert level.

After marathon high-level talks that ended early Tuesday, both sides reached a landmark agreement to defuse tensions, but the incident highlighted the need to be militarily prepared for any contingencies.

South Korea's military also took flak for not being able to keep track of North Korea's submarine fleet, which sailed out to sea as the tensions reached their peak.

The finance minister said that while Seoul will allocate more funds to building up the military's capabilities, it wants to push forward projects that can expand ties with the North.

"Efforts will be made to build the DMZ peace park and re-link the Gyeongwon rail line connecting Seoul with the North Korean port of Wonsan," he said.

The peace park plan is a pet project of President Park Geun-hye, who proposed its creation as a means to ease tensions between the two sides that are still technically at war. The Korean War (1950-53) ended in an armistice with no official peace treaty being signed.

Choi, who doubles as deputy prime minister in charge of economic affairs, said the government will do its utmost to maintain a balance between revenue and spending, but it will pursue an expansionary fiscal policy stance for 2016 to keep growth momentum alive.

In light of criticism that the government has been overly optimistic about growth forecasts in the past few years, measures will be taken to be more conservative in outlook, so as not to incur revenue shortfalls next year, he said.

Higher growth projections have led government planners to anticipate more taxes, but underperformance has led to a drop in state earnings, which forced Seoul to ask lawmakers for an extra budget this year. (Yonhap)