South Korea moves to overhaul 54-year-old education funding formula for AI, semiconductor era

The Lee Jae Myung administration has launched a full-scale effort to overhaul the local education finance grant system, a funding formula that has remained largely unchanged for 54 years. With tax revenues rising on the back of an AI and semiconductor boom, the government aims to redesign how public money is allocated — redirecting resources more efficiently toward strategic industries and future growth engines rather than automatically channeling 20.79 percent of domestic tax revenue into education budgets. Observers inside and outside the government see the reform as the first real test of the administration's ability to tackle what it calls the five great structural challenges: finance, public services, pensions, education and labor. The next two years, with no nationwide elections on the calendar, are widely described as a golden window for action.

The Ministry of Planning and Budget and the Ministry of Education will hold a public forum Wednesday at the Government Seoul Complex on the need to reform the education grant system, according to the government. The forum, convened at President Lee Jae Myung's initiative, marks the first time the two ministries — which have long held differing views on the issue — will debate it openly. The National Fiscal Strategy Council meeting scheduled for this month is also expected to take up the reform as a central agenda item.

The discussions focus not on cutting education spending but on redesigning the national fiscal allocation framework to keep pace with the times — channeling investment into future growth drivers such as AI and semiconductors while addressing the pressures of a low birth rate and an aging population. Some analysts view the reform as the opening move in easing the structural rigidity of the national budget.

The current education grant system was introduced in 1972. It automatically distributes a fixed share of domestic tax revenue to provincial and metropolitan education offices, with the current transfer rate set at 20.79 percent. When the system was created, South Korea's nominal gross domestic product stood at just $10.8 billion; last year it reached $1.87 trillion — a 173-fold increase. As the economy grew and tax revenues expanded, the education grant consistently followed suit.

The grant rose 77 percent from 43.16 trillion won ($28 billion) in 2016 to 76.44 trillion won under this year's supplementary budget. Some analysts project the figure could surpass 80 trillion won for the first time this year, once higher corporate tax receipts from a semiconductor industry recovery are factored in.

Meanwhile, the school-age population has been shrinking rapidly. Annual births, which stood at around 1 million when the system was introduced, fell to 250,000 last year, and enrollment in elementary, middle and high schools has declined every year. The disconnect — a dwindling student population paired with a grant that automatically expands with tax revenue — has amplified calls for a fundamental rethink of how education funds are distributed.

The OECD has also urged South Korea to reform its education finance structure. In its 2026 Korea Economic Survey, the organization recommended that the country review how it funds primary and secondary education and expand higher education financing to strengthen university competitiveness.

No other advanced economy that has already grappled with aging ties its education budget to a fixed share of domestic tax revenue. Japan calculates its national education contribution annually based on assessed demand, and the United States and the United Kingdom similarly reassess needs before setting their education budgets.

Attempts to reform the education grant system have been made under previous administrations, only to collapse each time. Amending the Local Education Finance Grant Act and related legislation is required, and opposition from provincial education superintendents and teachers' organizations has consistently proved formidable.

This time, however, analysts say the political environment is different. Park Hong-keun, a four-term former lawmaker now serving as Planning and Budget minister, has pushed forcefully for normalizing and streamlining national finances since taking office. "Regardless of any political cost to myself, I want to resolve this issue through open communication with the public," Park has said.

The absence of any nationwide election for the next two years is also seen as making this an opportune moment for structural reform. There is a growing sense of urgency within and around the government that failing to act during a period of relatively low electoral pressure would make it even harder to address national challenges in pensions, labor and education.

Fiscal experts recommend redesigning the grant so that its total size reflects the school-age population, education demand and the economic growth rate, and using any savings to invest in human capital across the full life cycle — from early childhood care and higher education to vocational training. The argument is that the fiscal formula must change to reflect an era defined by a low birth rate, AI and a semiconductor supercycle.

However, with the Ministry of Planning and Budget and the Ministry of Education still far apart on the details, reaching a concrete reform plan is expected to be a protracted process. Even if a direction emerges from the public forum and the National Fiscal Strategy Council meeting, the reform will ultimately need to clear the National Assembly through an amendment to the Local Education Finance Grant Act.