R&D programs trimmed by 6.2 trillion won

Mandatory spending reforms to save 69 trillion won

Basic pension revamped to strengthen support for low-income recipients

The government has launched an aggressive spending overhaul worth about 108 trillion won ($78.6 billion) as it drafts next year's budget, scrapping more than 2,100 programs and restructuring mandatory expenditure regimes covering education grants and unemployment benefits.

The plan aims to boost fiscal efficiency by eliminating low-performing and wasteful programs while simultaneously reforming the statutory frameworks that govern mandatory spending.

According to the 2027 budget proposal confirmed at a Cabinet meeting Tuesday, next year's total spending restructuring amounts to 107.6 trillion won — 38.6 trillion won in discretionary spending cuts and 69 trillion won in mandatory spending reforms. The government said it reduced discretionary outlays by 15 percent and achieved savings of more than 10 percent in mandatory spending through structural reform, exceeding its original target.

The government has moved to overhaul the local education subsidy system for the first time in 55 years. The photo shows an empty schoolyard at an Incheon elementary school that held no entrance ceremony last year due to a lack of incoming students. [Herald DB]
The government has moved to overhaul the local education subsidy system for the first time in 55 years. The photo shows an empty schoolyard at an Incheon elementary school that held no entrance ceremony last year due to a lack of incoming students. [Herald DB]

The scale of discretionary spending cuts is the largest on record. Savings stood at 12.8 trillion won in 2022, rising to 24.1 trillion won in 2023, 22.7 trillion won in 2024, 23.9 trillion won in 2025 and 26.9 trillion won this year, before jumping to 38.6 trillion won next year. The government said it reviewed all fiscal programs from scratch, cutting low-performing and inefficient ones and abolishing more than 2,100 projects — over 10 percent of all programs.

The restructuring spanned routine operating expenses, research and development, and policy finance. Shifting promotions online and scaling back events saved 100 billion won, while moving meetings and training sessions to remote formats and trimming policy research and maintenance costs saved an additional 500 billion won.

Consolidating agricultural and fisheries policy funds and converting renewable energy loans to interest-rate subsidy arrangements saved 3.8 trillion won. Adjusting R&D programs yielded 6.2 trillion won in savings, and streamlining low-performing Official Development Assistance projects cut 900 billion won. Abolishing the Type 2 national scholarship and scaling back general job-skills training saved a further 200 billion won and 300 billion won, respectively.

A defining feature of this round of restructuring is that it goes beyond trimming discretionary spending to overhaul the statutory frameworks that determine mandatory outlays. The government put mandatory spending savings at 69 trillion won, encompassing adjustments to local government grants, education subsidies and a revamp of the unemployment benefit system.

The most significant change is the first overhaul of the local education subsidy system in 55 years. Some 32.5 trillion won in education grants — the portion linked to tax revenue above the 10-year trend line for domestic taxes — will be redirected into a future-response fund. The formula that currently allocates 20.79 percent of domestic tax revenue automatically to education grants will also be revised.

Starting next year, grants will be set based on the previous year's allocation adjusted for the average nominal growth rate over the preceding three years and changes in the school-age population, with the demographic factor weighted at 35 percent. The government said it took into account that teacher and staff salaries — which do not fall in line with declining student numbers — account for 60 percent of education spending, as well as the potential shock to schools.

Resources freed up by the grant reform will be reinvested in education. The gap between the current 20.79 percent formula and the new formula — excluding the above-trend tax revenue — will be deposited into an education and talent development account within the future-response fund, to be used for early childhood, secondary and lifelong education and the cultivation of top talent.

For local grant transfers, 30.5 trillion won of above-trend domestic tax revenue will similarly be set aside in the future-response fund.

Reforms to the unemployment benefit system are projected to save 1.4 trillion won. Benefits currently calculated on a seven-day weekly basis will be adjusted to six days by excluding unpaid rest days, and eligibility for early re-employment bonuses will also be tightened. The government said the changes are designed to strengthen incentives for re-employment, with the savings reinvested in measures to address the low birth rate, including maternity protection programs.

Separately from the mandatory spending restructuring, the government will also reform the basic pension system. The basic pension budget will rise from 23.11 trillion won this year to 25.65 trillion won next year, an increase of 2.54 trillion won. The revamp will shift toward a tiered structure that provides stronger support for lower-income recipients, but the government said it will not cut existing benefits to fund the change.

"The basic approach is to adopt a bottom-heavy structure — but rather than breaking the top stone to prop up the bottom, we will leave the top stone in place and reinforce the bottom," said Cho Yong-beom, vice minister of the Ministry of Planning and Budget, at a pre-announcement briefing.

Specifically, the reduction rate applied when both spouses receive the basic pension will be lowered from the current 20 percent to 10 percent — a plan originally scheduled for 2030 that has been brought forward by three years to next year. The government will also expand eligibility to cover the bottom 45 percent of income earners among recipients of occupational pensions.


y2k@heraldcorp.com