The government will unveil Friday its plan to dismantle the 54-year-old formula that automatically ties local education grants to domestic tax revenue, replacing it with a new calculation that factors in economic growth and demographic change.

The overhaul will be announced alongside a proposal to establish a "Future Response Fund" financed partly by surplus tax revenue. The plan aims to redirect money that had been flowing automatically to elementary and secondary education toward youth, future growth engines, regional development, and education and talent programs.

Students arrive at an elementary school in Yeongdeungpo-gu, Seoul. [Yonhap]
Students arrive at an elementary school in Yeongdeungpo-gu, Seoul. [Yonhap]

The Ministry of Planning and Budget and the Ministry of Education are in final talks to meet a Friday target for releasing the reform plan, according to related ministries.

The two ministries have agreed on the broad direction — scrapping the domestic tax linkage and introducing a new formula — but are still working through details on the guaranteed level of education funding and the scope of the Future Response Fund.

Under the current system, local education grants are funded by 20.79 percent of domestic tax revenue plus a portion of the education tax, and distributed to provincial and metropolitan education offices. When domestic tax revenue rises, grants rise automatically regardless of student enrollment or actual educational demand.

The new approach under discussion would sever that automatic link. Instead of allocating a fixed share of domestic tax revenue, the formula would calculate grant levels based on the average nominal growth rate over the preceding three years and changes in the school-age population — reflecting both demographic decline and economic conditions.

The government has sought to reform the domestic tax linkage, introduced in 1972, because education grants have continued to grow even as the school-age population shrinks.

The school-age population stood at 10.73 million in 1972 but has fallen to about 4.922 million this year. Meanwhile, education grants grew roughly 77 percent — from 43.2 trillion won ($30.5 billion) in 2016 to 76.4 trillion won in this year's supplementary budget — driven by rising tax revenue as the economy expanded, with no adjustment for the declining number of students.

The trend is expected to accelerate: strong earnings by chipmakers this year are forecast to feed into corporate tax revenue next year, which under the current formula would push grants even higher.

Applying the new formula being discussed, next year's grants are estimated at around 80 trillion won, roughly 5 percent above this year's supplementary budget figure of 76.4 trillion won. Keeping the current domestic tax linkage would push the figure to around 100 trillion won. Either way, grants would still increase from this year's level, but the choice of formula creates a gap of about 20 trillion won.

Running alongside the grant reform is the proposed Future Response Fund. The government is considering accumulating tax revenue that exceeds long-term trend levels into the fund and deploying it for investment in youth, future growth drivers, regional development, and education and talent development.

Some observers estimate the fund could exceed 100 trillion won if revenue gains from the semiconductor boom are combined with resources freed up by the grant reform. The actual size will depend on next year's tax revenue outlook, the fund's accumulation criteria, and the final shape of the grant overhaul.

The central sticking point heading into the announcement is how to guarantee education funding after the domestic tax linkage is abolished. The Ministry of Education wants the Local Education Finance Grant Act to explicitly enshrine a mechanism ensuring stable funding at a level comparable to the current 20.79 percent formula.

The Ministry of Planning and Budget is understood to be resistant to that position. Its view is that locking in a similar funding level through a different mechanism would undermine the very purpose of the reform — giving the government more flexibility in allocating national fiscal resources by breaking the automatic link between tax revenue and education grants.

The two sides also diverge on how the Future Response Fund's education component should be used. The Ministry of Planning and Budget wants a dedicated education account within the fund to cover early childhood education, higher and lifelong education, and AI and advanced-field talent development — areas that existing education grants have struggled to address.

The Ministry of Education, by contrast, wants the fund available for elementary and secondary education as well, arguing that if the new formula produces smaller grant increases than the current system, the fund should be able to make up the difference. The Ministry of Planning and Budget counters that allowing this would dilute the reform's goal of shifting the fiscal structure away from its heavy concentration on primary and secondary schooling.

Even after the plan is released, resistance from the education sector is expected to persist. Educators maintain that a falling school-age population does not automatically translate into lower funding needs — fixed costs such as teacher salaries and school facility maintenance cannot be cut at the same rate as enrollment, and new demands such as the high school credit system, after-school care programs, and student counseling services consistently generate additional spending.

In remote and island communities in particular, schools must maintain a minimum level of operation and educational services regardless of how few students remain, making it difficult to use demographic decline as a direct justification for slowing grant growth, the education sector argues.


y2k@heraldcorp.com