[Opinion] The Merits and Demerits of the Local Education Finance Grant System

Discussions on reforming the Local Education Finance Grant System (Grant System) are heating up. This is understandable, given that this year’s grant budget has increased by a whopping 11.8 trillion won compared to last year. For the Ministry of Economy and Finance, which had been eyeing an opportunity to reform the grant system, the timing is perfect. One researcher claims that if the grant system is restructured from a domestic tax-linked method to a Gross Domestic Product (GDP)-linked method that reflects the declining school-age population trend, it could save 1,000 trillion won in finances over the next 40 years.

Media outlets that had criticized the Ministry of Economy and Finance for repeatedly drafting supplementary budgets due to failure to predict tax revenues for even four months ahead eagerly reported the claim of saving 1,000 trillion won over 40 years. Pressuring the need for grant reform with the frame of saving 1,000 trillion won over 40 years can be seen as a form of misleading the public. The grant system is a mechanism where the state supports part of the expenses required for local governments to establish and operate educational institutions and administrative bodies. It started in 1972 with domestic tax grants and salary grants, later adding education tax grants and increased grants. At the end of 2004, salary grants and increased grants were integrated into domestic tax grants, leaving only domestic tax grants and education tax grants. In 2020, increased grants were temporarily reinstated for free high school education.

The main criticism of the current grant system focuses on the domestic tax-linked method. The problem lies in the unconditional allocation of 20.79% of domestic tax revenue to city and provincial education offices regardless of demand, even as student numbers decline. The domestic tax-linked method appears to be a stable mechanism for securing education finances. However, it has been used as a basis to refuse national treasury support when grant deficits occur and has repeatedly provided an excuse to shift national policy projects onto grant-funded projects.

Looking back, there have been many years when grants decreased, and even when they increased, they often failed to cover rising personnel costs. Given the high proportion of personnel expenses in education finance, a reduction in grants often led to personnel costs encroaching on operating expenses, resulting in educational deterioration.

Over the past decade, local bond issuance has amounted to 15.4 trillion won, BTL repayments to 7.9 trillion won, and local bond repayments to 17.9 trillion won, with outstanding BTL and local bonds still reaching the 5 trillion won range. Given these circumstances, it is questionable whether the grant system can be criticized based solely on this year’s budget increase. The 11.8 trillion won increase this year also reflects a base effect from the 1.7 trillion won decrease in 2020.

The grant system has been the driving force behind implementing compulsory middle school education, the 3-5 year-old Nuri curriculum, and free high school education, as well as improving the outdated class sizes from 35.8 students per class in elementary, 38 in middle, and 42.7 in high school 20 years ago to 21.8, 25.2, and 23.4 respectively, approaching the OECD (Organisation for Economic Co-operation and Development) average educational conditions. This is not to say that reforming the grant system is unnecessary. Adjusting the grant rate means waiting until the decrease in student numbers leads to a reduction in the number of schools, classes, and teachers. This is because the unit of expenditure in education finance is the number of classes, not students. To shift investment from improving educational conditions to enhancing educational quality, a GDP-linked method that would cause a sharp decrease in grants cannot be an alternative.

In 2005, when salary grants, increased grants, and national subsidies were integrated into domestic tax grants, raising the grant rate from 13% to 20.79%, the grant size became more sensitive to fluctuations in domestic tax revenue. When domestic tax deficits occur, personnel costs encroach on operating expenses, and conversely, when domestic tax revenue increases significantly, grants increase excessively. It is worth considering diversifying funding sources in the short term.

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

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