Taiwan's cabinet will unveil next year's budget on Thursday, including a breakdown of where defence spending will go, but Lai confirmed media reports that 2027's overall defence budget would exceed T$1 trillion $A44.15 billion for the first time.
His announcement comes as China, which views democratically governed Taiwan as its own territory, has ramped up military and political pressure over the past few years to assert its claims, which Taipei strongly rejects.
But Taiwan also faces calls from Washington to spend more on its own defence, mirroring US pressure on Europe, something Lai has enthusiastically embraced.
Addressing a meeting about next year's budget, Lai said defence spending in 2027 would reach T$1.1225 trillion - exceeding three per cent of gross domestic product, according to a transcript of the remarks released by his office.
He said this "demonstrates Taiwan's determination to strengthen its self-defence capabilities".
"Investing in defence is investing in peace; we will continue to build a more solid defence force to maintain peace and stability in the Taiwan Strait and the region," Lai added.
Taiwan's government has made military modernisation a key policy platform and has repeatedly pledged to spend more on its defences, including developing made-in-Taiwan submarines, given the rising threat from China.
China's military operates almost daily in the waters and skies around Taiwan, and Beijing has also been honing new tactics, such as coastguard "law enforcement" patrols off Taiwan's east coast in the Pacific Ocean.
William Chung, an assistant research fellow at Taiwan Defence Ministry think-tank the Institute for National Defence and Security Research, said China's east coast activities were not only aimed at exerting psychological pressure, but also combat training and intelligence gathering.
"If actual hostilities break out across the Taiwan Strait, the entire eastern maritime area of Taiwan will be Taiwan's most critical outlet to the outside world," he told a forum in Taipei earlier on Monday.
Taiwan finished its annual Han Kuang military drills last week, simulating a range of battle scenarios including how to break a potential Chinese maritime blockade.
China's Defence Ministry called the drills a "wasteful charade" that "stoked war panic".
Lai also faces a challenge from Taiwan's opposition-dominated parliament, which only passed this year's budget late on Friday after months of delays.
The two main opposition parties say they will not write blank cheques for the government.
