Now is the time to reform local education grants

Choi Han-soo

The author is a professor in the School of Economics and Trade at Kyungpook National University.

The government recently unveiled a plan to reform the Local Education Grant system. At its core is abolishing the mechanism that automatically allocates 20.79 percent of national internal tax revenue to education and replacing it with a formula reflecting economic growth and changes in the school-age population. A new Future Response Fund will also be established.

Previous administrations repeatedly failed to achieve such reform. Given the competing interests involved and the way mandatory education spending has constrained fiscal flexibility, the proposal represents meaningful progress.

The current system was created when the student population was rapidly expanding. Today, however, the school-age population is shrinking sharply, while higher education, lifelong learning and advanced talent development have become increasingly important. Yet a fixed share of tax revenue continues to flow automatically to elementary and secondary education.

The contradiction grows over time: a system designed for the past increasingly determines future spending. Grant amounts are set mechanically according to tax revenue, regardless of student numbers or actual educational demand.

Critics therefore liken the system to an automatic bank transfer. Yet health insurance and the national pension pay out more as the number of beneficiaries grows. Education grants work in reverse. The number of children benefiting declines each year, while funding continues to increase.

The existing system has had clear benefits. Linking education funding to national tax revenue prevented school budgets from being squeezed by other priorities. It also helped provide quality public education across regions regardless of differences in local fiscal capacity.

But stability came at the cost of rigidity, which is now undermining spending efficiency.

Even within education, money does not necessarily flow where it is most needed. Elementary and secondary education budgets automatically increase with tax revenue regardless of demand, while investment in universities and lifelong education remains inadequate, compounded by the effects of Korea’s half-price tuition policy.

Health care and education are among Korea’s most highly ranked public services internationally, yet their reputations differ. Koreans living abroad often seek medical treatment when visiting home, reflecting the high quality of Korean health care. Education is another matter. Many families choose overseas study before their children enter university. That underscores the urgent need for investment in higher education.

Public finance is ultimately about reallocating limited resources according to priorities. Automatically tying one sector to tax revenue increases pressure elsewhere. This is particularly problematic as population aging and industrial transformation increase demand for welfare spending and investment in human capital.

If demographics change, fiscal flows should change as well. This does not mean education matters less. It means reconsidering what should receive investment under the broad heading of education.

Educators reasonably argue that classrooms and teachers cannot be reduced at the same rate as student numbers. Demand is also growing for services such as child care and special education. But those are reasons to make reform more sophisticated, not to block it.

Rather than mechanically reducing budgets as student numbers fall, the government should establish rules that reflect per-student spending, economic growth and changing educational needs.

Concerns that reform will destroy the minimum foundation for education funding are overstated. In a country where education commands intense public attention, a government that irrationally slashed education spending would struggle to survive politically.

Insisting on preserving the existing linkage itself could instead be mistaken for defending an established share of public resources. What must be protected is not a particular formula but the quality of education.

The direction has been set, but implementation matters. Two principles should guide the process.

First, the government must honor its pledge that total education grants will not fall below current levels. Second, it must demonstrate that resources made available through reform will flow to higher education, lifelong learning and vocational education, benefiting more people. These principles should be central to the design and operation of the Future Response Fund.

A system left largely untouched for half a century has finally come up for reform just as the semiconductor boom has created greater fiscal room. If structural change is postponed while resources are available, far more painful adjustments will be required once that room disappears.

If Korea misses this opportunity, the next one will come much later and under far worse conditions. The National Assembly should not let this moment pass. It should complete the legislation needed to finish the reform.