Yejungcheo: "If Local Education Grants Are Linked to GDP, 25 Trillion Won Saved Annually"

Publication in Budget Policy Research Journal
Reflecting Decline in School-Age Population Can Lower Growth Rate Compared to GDP Growth Rate
National Debt Ratio Also Reduced by Up to 28.2%P

[Asia Economy Reporter Lee Ji-eun] An analysis has emerged suggesting that if the calculation method for the Local Education Finance Grant, which is allocated as a fixed percentage of domestic tax revenue, is restructured to link with the gross domestic product (GDP) growth rate, it could result in over 1,000 trillion won in fiscal savings over 40 years.

The National Assembly Budget Office estimated in its report titled "The Need to Reform the Calculation Method of the Local Education Finance Grant and Its Long-term Fiscal Capacity Improvement Effects," published on the 21st in the academic journal "Budget Policy Research," that applying a method of allocating grants linked to GDP would save approximately 1,046.8 trillion won in fiscal expenditure by 2060 compared to the current domestic tax revenue-linked method.

The Local Education Finance Grant, used for elementary and secondary education, currently receives a mandatory allocation of 20.79% of domestic tax revenue. Although the total amount increases annually with economic growth, criticism has been raised that due to the declining school-age population caused by low birth rates, the budget cannot be used efficiently where needed.

The Budget Office argued in the report that instead of mandatorily allocating a fixed portion of domestic tax revenue, the Local Education Finance Grant system should be reformed to increase the total grant amount from the previous year proportionally to nominal GDP. They also suggested incorporating the ratio of the school-age population to the total population, allowing the grant increase rate to be slower than the GDP growth rate as the school-age population declines each year.

The fiscal savings from the reform plan are expected to slightly exceed 25 trillion won annually. However, despite the reduction in funding, the report emphasized that concerns from the education sector about a decline in education quality can also be prevented. The report stated, "The newly calculated total grant amount is on average 14 trillion won larger annually than the minimum required grant estimated under the assumption of maintaining the student-to-class ratio and student-to-teacher ratio at the top standards of the Group of Twenty (G20) countries until 2060."

Under the current system, this is also positive for improving the national debt ratio, which is projected to reach 144.8% by 2060. The Budget Office forecasted that after adopting the reform plan, the ratio would decrease by 28.2 percentage points to 116.6%. They added, "A more proactive role by the legislature, which will put the final stamp on the system improvement, is necessary."

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