Gov't moves to overhaul education subsidy formula for first time in 54 years

With a semiconductor boom expected to generate a massive tax windfall this year, the government is moving to reform the local education finance grant system for the first time in 54 years. The overhaul is likely to take time, however, given the wide gap between the Ministry of Planning and Budget and the Ministry of Education.

The Ministry of Planning and Budget and the Ministry of Education are in discussions on revising the Local Education Finance Grant Act to restructure how education grant funds are allocated, according to the government Sunday.

The local education finance grant is the central government's transfer to each provincial and metropolitan office of education and serves as their primary revenue source. It is funded by 20.79 percent of domestic tax receipts plus a portion of the education tax levied on national taxes.

The grant was designed to be tied to domestic tax revenue rather than calculated through the standard budget process — where spending is estimated based on program needs — because schools were severely underfunded when the system was introduced in 1972.

Over the past 54 years, however, conditions have changed dramatically. Grants to elementary, middle and high schools have consistently grown, while the low birth rate has steadily reduced student enrollment, bringing per-pupil public spending to a level that is no longer considered inadequate by international standards.

Public expenditure per student — covering all spending by the government and private households, excluding private tutoring costs — stood at $19,794 for elementary education and $25,267 for secondary education in 2022, both above the OECD average.

The school-age population has fallen by half since the grant system was introduced, dropping from 10.73 million in 1972 to 4.922 million this year, according to the median population projection by the Ministry of Statistics.

Over the past decade, as the low birth rate has accelerated, the education grant has grown by more than 30 trillion won — from 43.1615 trillion won (about $28.3 billion) in 2016 to 76.4381 trillion won under this year's supplementary budget.

As a result, education offices have increasingly channeled funds into cash-based welfare programs. A 2023 Board of Audit and Inspection audit flagged the practice as problematic.

In the recent superintendent elections, many newly elected officials ran on campaign pledges of cash welfare — including full subsidies for student public transit, basic education allowances and cultural arts vouchers for students.

The rigid restrictions on how the grants can be spent also contribute to inefficiency. Education grants may only be used for elementary, middle and high school education — not for universities or early childhood programs.

In response to pressure from the higher education sector, a special account for higher and lifelong education support was established in 2023, drawing on a portion of the education tax to fund universities and continuing education. Originally set to run for three years, the account had its sunset extended last year to Dec. 31, 2030 — a five-year extension.

The immediate concern is that this year's semiconductor boom is expected to produce a record tax surplus. Extrapolating from the tax collection pace through April, the education grant could arithmetically reach 81.1045 trillion won this year — 15.4 percent more than last year's final settlement of 70.2812 trillion won. The actual figure will depend on education tax revenues and the settlement of fiscal year surpluses.

That would be nearly 5 trillion won more than the 76.4381 trillion won projected in this year's supplementary budget, and roughly 10 trillion won above the original 2026 budget figure of 71.6687 trillion won.

The two ministries are understood to be holding behind-the-scenes talks. The Ministry of Planning and Budget is said to favor revising the tax-linked formula itself.

Planning and Budget Minister Park Hong-keun, speaking at an open forum on expenditure restructuring held June 8, said the government "cannot ignore factors such as the school-age population" and that "strengthening the quality of elementary, middle and high school education is clearly necessary," while stressing the need to "overcome the rigidity created by the linked structure" of the grant.

The Ministry of Education, by contrast, wants to preserve both the linked formula and the current domestic tax allocation rate of 20.79 percent. It is understood, however, to have proposed removing the restriction that limits grant spending to elementary, middle and high schools, which would allow the funds to be used for early childhood and university education as well.

Other options on the table include maintaining the domestic tax linkage rate while capping the grant at a set ceiling and channeling any excess into an education finance stabilization fund, as well as a proposal to factor in the nominal growth rate and the school-age population when calculating the grant amount.

Given the wide gap between the two ministries, reaching a consensus is expected to take time. Some observers doubt a proposal will be ready before the national fiscal strategy conference scheduled for next month.

"The school-age population keeps shrinking, so our basic position is that we should use the funds more efficiently," a Ministry of Planning and Budget official said. "We have various options on the table and are working through them."