South Korea to scrap 55-year-old automatic education grant formula, adjust local subsidy base

South Korea will next year abolish the 55-year-old system that automatically ties education grants to domestic tax revenue. In place of the current formula — which allocates a fixed 20.79% of domestic taxes to education grants — the government will adopt a new method that factors in the average nominal growth rate over the preceding three years and 35% of the change in the school-age population over the same period.

The local subsidy rate will remain at 19.24%, but the base used to calculate it will be adjusted to exclude contributions set aside for a new future response fund.

The Ministry of Planning and Budget said Friday it held the first meeting of its Fiscal Management Strategy Council to discuss the proposed overhaul of the local education finance grant and local subsidy systems.

Under the current system, education grants draw on 20.79% of domestic tax revenue plus a portion of the national education tax. When domestic tax receipts rise, grants increase automatically regardless of changes in the school-age population, and they fall when revenues decline.

The domestic-tax linkage was introduced in 1972, and the allocation rate has been raised several times, reaching 20.79% in 2020. Critics have long argued that the mechanism causes grants to swing sharply with tax revenues rather than tracking actual student numbers. The school-age population — children aged 3 to 17 — fell 32.8% from 8.8 million in 2010 to 5.91 million last year, yet grants surged 27.6% from 59.6 trillion won ($42.8 billion) in 2021 to 76 trillion won in 2022 before dropping 14.0% to 65.4 trillion won the following year.

Under the new formula, the annual grant will be calculated by applying the three-year average nominal growth rate to the previous year's grant amount and then adjusting by 35% of the three-year average change in the school-age population. The 35% weighting reflects the reality that rigid expenditures such as teacher salaries cannot be reduced quickly even as student numbers fall.

For example, if the average nominal growth rate over the past three years is 5% and the school-age population has declined by an average of 2% per year, the 35% weighting translates the population decline into a 0.7-percentage-point adjustment. The following year's grant is then calculated by multiplying the previous year's amount by 1.05 to reflect growth and by 0.993 to reflect the population decline.

A safeguard will ensure the total grant never falls below the previous year's level. The government plans to write into the Local Education Finance Grant Act a provision requiring any shortfall produced by the formula to be made up in full.

Under the government's projections, total education grants will rise from 75.7 trillion won this year to 78.9 trillion won in 2027, 84.3 trillion won in 2028, 90.1 trillion won in 2029 and 92.7 trillion won in 2030.

The projected average annual increase of 5.2% for 2026–2030 exceeds the 4.4% average annual increase in the existing 2025–2029 medium-term plan. Compared with that plan, the new formula would deliver 4 trillion won more this year, 1.8 trillion won more in 2027, 2.9 trillion won more in 2028 and 4.2 trillion won more in 2029.

As total grants grow while the school-age population shrinks, the per-student grant is also set to rise sharply. The grant per school-age child will increase from 11.9 million won last year to 13.3 million won this year, 14.4 million won in 2027, 16.1 million won in 2028, 18.1 million won in 2029 and 19.5 million won in 2030 — an average annual increase of 10.1% for 2026–2030, outpacing the 8.5% average recorded from 2006 to 2025.

Any gap between 20.79% of domestic taxes — excluding future fund contributions — and the amount produced by the new formula will be redirected back into education.

The government plans to establish an education and talent account within the future response fund, channeling those resources into early childhood education, higher and lifelong education, and efforts to attract and retain top talent. The gap amount will be legally designated as revenue for that account and barred from transfer to any other account.

The government also expects the reform to ease fiscal imbalances across education levels. As of 2022, South Korea's per-student public spending on primary and secondary education stood at 166% of the OECD average, while spending on higher education reached only 69%. The government intends to reinvest the resources freed up by the grant reform into early childhood, higher and lifelong education to broaden investment across all levels of schooling.

Local subsidies distributed to municipal governments will also be partially adjusted. While the current 19.24% allocation rate will be kept, the government will first deduct contributions to the future response fund from total domestic tax revenue before applying the rate to the remainder.

A local account will be set up within the future response fund to reinvest those resources in regional growth hubs and improvements to residential conditions. The government also plans to add a provision to the Local Subsidy Act allowing additional support for local governments based on economic conditions and fiscal circumstances, with the aim of underpinning stable local public finances.

The government plans to open a public comment period on the related legislative package from Monday through Friday next week, pass it through a Cabinet meeting on Sept. 1 and submit it to the National Assembly on Sept. 3 alongside next year's budget proposal.