[In-Depth Look] Education Finance Shaken by Optical Illusions

The budget for local education finance grants (grants) for next year has reportedly increased by 11 trillion won compared to this year's original budget and by 4.7 trillion won compared to the supplementary budget. The argument that "the grant system is unreasonable because the budget keeps increasing even though the number of students is decreasing" sounds convincing.

The grants are funded by 20.79% of the total domestic tax revenue and the education tax. When the domestic tax budget increases, the grants increase accordingly regardless of demand. Even in a situation where the number of students is decreasing, the grant law prevents reducing the grants. When next year's budget increased by as much as 11 trillion won, the Ministry of Economy and Finance raised the need for improvement. Based on the original budget, the increase was only 100 billion won in 2020 compared to the previous year, and it decreased by 2.1 trillion won in 2021. On the other hand, the annual increase in personnel expenses for metropolitan and provincial offices of education, where personnel costs account for 60%, reached 2 trillion won. With the implementation of free high school education eliminating major independent revenue sources such as high school entrance fees and tuition fees, if the grants do not increase by more than 2 trillion won, operating or facility expenses must be cut due to the increase in rigid personnel expenses, which ultimately restricts educational activities.

The truth about the 11 trillion won increase in grants for next year is as follows. In the current situation where supplementary budgets have become routine, the final budget rather than the original budget should be used as the basis. According to the final budget, compared to the previous year, 2020 decreased by 1.7 trillion won, 2021 increased by 6.1 trillion won, and 2022 increased by 4.7 trillion won. Considering the annual 2 trillion won increase in personnel expenses, the real changes are a decrease of 3.7 trillion won in 2020, an increase of 400 billion won in 2021, and an increase of 2.7 trillion won in 2022.

In the end, over the three years from 2020 to 2022, the budget excluding personnel expenses increased by only 3.1 trillion won, which is the sum of the real increases over two years. If the budget excluding personnel expenses increased by an average of 1 trillion won per year over three years, this is a normal trend of grant increases. The 11 trillion won increase in grants was not excessive. This is merely an optical illusion created by the Ministry of Economy and Finance repeatedly revising the domestic tax budget. They only pointed out the increase expected next year and remained silent about the recent decreases. This is not something to blame on the unreasonable grant system but rather a matter of reflecting on inaccurate domestic tax forecasts. In other words, it is not a rationale for reforming the grant system but a reason to improve the accuracy of tax revenue forecasts.

The Ministry of Economy and Finance's mistake does not end here. Next year, due to the increase in the local consumption tax transfer rate of value-added tax, the total domestic tax revenue decreased, causing a deficit in grants. In the past, when this happened, the grant rate was increased or local government transfers were raised to compensate, but the next year's budget did not reflect any compensation. The logic is that since the number of students decreased and the grants increased by 11 trillion won, there is no need for compensation.

When the number of students decreases, financial demand should naturally decrease. However, a decrease in the number of students does not necessarily lead to a decrease in demand. Financial demand decreases only when educational conditions are optimal so that additional investment in educational conditions is unnecessary, and when the decrease in the number of students leads to a decrease in the number of classes and teachers. Currently, educational conditions are not optimal, and the number of classes and teachers is actually increasing. It is time to invest additionally not only in improving the educational environment but also in educational program reforms such as smart education and the introduction of the high school credit system. Although grants will eventually need to be reduced if the number of students continues to decline, it is not the case now. If, as the Ministry of Economy and Finance claims, grants have not increased significantly and financial demand has not decreased due to the decline in student numbers, the deficit in grants caused by the reform of the local consumption tax must be compensated. This was also a promise made when establishing the ‘Plan for Promoting Fiscal Decentralization.’

Song Ki-chang, Professor, Department of Education, Sookmyung Women’s University

This content was produced with the assistance of AI translation services.