Next year's spending cuts to exceed W50tr, double this year's — education ministry gets incentive for deep cuts

The government appears to have carried out spending restructuring well in excess of the 50 trillion won ($35.9 billion) it had initially signaled when drawing up next year's budget — more than double the 27 trillion won in cuts made this year, which had been the largest on record.

A sweeping overhaul of the local education finance grant system — the first in 55 years — generated substantial savings, and the Ministry of Education, which absorbed the deepest cuts, is understood to have been rewarded with priority budget allocations for its key programs as an incentive.

According to related authorities Sunday, the Ministry of Planning and Budget set targets of reducing mandatory spending by 10 percent and discretionary spending by 15 percent in compiling next year's budget. The government said it aimed to achieve roughly 50 trillion won in spending restructuring through those measures.

The move drew attention particularly because it included reduction targets for statutory mandatory expenditures — costs that have grown year after year as the population ages and welfare needs expand.

With the budget now in its final stages of preparation, the actual scale of spending restructuring is expected to significantly exceed 50 trillion won.

The overhaul of the education grant system is projected to deliver especially large savings in the education sector.

On Friday, the government announced its plan to reform the local education finance grant system, scrapping the existing mechanism under which education grants automatically increase in lockstep with growth in domestic tax revenue.

Under the new formula, grants will instead be calculated by multiplying the previous year's education grant by the average annual nominal growth rate over the preceding three years and 35 percent of the rate of change in the school-age population.

Applying the new formula, next year's education grant would come to 78.9 trillion won — roughly 20 trillion won less than the approximately 100 trillion won the grant had been projected to reach under the old system.

This is estimated to cut mandatory spending by about 20 percent. The government decided to measure savings from mandatory expenditures — which would otherwise rise every year — by comparing spending levels before and after the policy change, regardless of whether an actual budget increase occurred.

Ministries that achieve significant spending cuts will receive corresponding rewards. The government established in its budget guidelines a principle that ministries with outstanding restructuring performance will receive priority funding for their core programs.

Minister Park also made clear at a town hall meeting in April that savings would not be redirected to other ministries. "There are concerns that reduced program budgets will be handed to other ministries — that is not what we are doing," he said. "A ministry's budget will not be shifted to other areas; the point is to set national priorities within that ministry's own domain."

Accordingly, the Ministry of Education — having undertaken deep restructuring through the education grant overhaul — is understood to have had its funding needs for key programs reflected as a priority in the budget.

The government plans to pursue restructuring through institutional reform not only for education grants but for other mandatory expenditures as well.

In the welfare sector, a reform of the basic pension system has also come under review.

The government reviewed reform options for the basic pension, weighing retirement income security and fiscal sustainability, and plans to include the reform proposal in next year's budget to be announced later this month.

The reform is set to introduce a structure that concentrates support on lower-income recipients — providing additional base pension amounts tied to income level, giving more to those with less.

The basic pension is designed to support a comfortable retirement for the elderly. Currently, the bottom 70 percent of seniors aged 65 and older by income all receive the same amount.