The government has placed 'grant-in-aid (earmarked tax)' as the top target for mandatory expenditure restructuring. This is due to the structure where a certain percentage (20.79%) of national tax is automatically allocated, causing the grant to increase every year and leading to 'inefficient financial management' despite the rapid decline in the school-age population.
However, legislative amendments must be negotiated with the National Assembly and the Ministry of Education to carry out the restructuring, as mandatory expenditures have budgets defined by law as opposed to discretionary expenditures, which are based on project budgets.
According to government officials on the 26th, the Ministry of Economy and Finance is recently examining the efficiency of mandatory expenditures in relation to grant-in-aid (earmarked tax). This follows the directive from Lee Im-kyun, the Deputy Minister of Economy and Finance, at a meeting on expenditure efficiency on the 17th, where he said, "We must do our utmost to enhance financial efficiency by closely reviewing the medium- to long-term fiscal needs and pursuing system improvements."
Earlier, President Lee Jae-myung indicated his intention to continue the active role of finance during a Cabinet meeting on the 15th. President Lee instructed each ministry to boldly adjust wasteful expenditures.
Grant-in-aid (earmarked tax) is a budget allocation by the state to support the educational administration of local governments and is a major source of income for education offices nationwide. The method of automatically allocating a certain percentage of national tax has been in place for over 50 years since the enactment of the 'Grant-in-aid (earmarked tax) Act' in 1972, a time of population expansion.
The percentage of grant-in-aid (earmarked tax), which was 11.8% of national tax in 1972, has increased to ▲13.0% in 2001 ▲19.4% in 2005 ▲20.0% in 2008 ▲20.27% in 2010 ▲20.46% in 2019 ▲20.79% in 2020. The scale of the earmarked tax has nearly doubled from 39.4 trillion won in 2015 to 81.3 trillion won in 2022, with an estimated 72.3 trillion won expected this year.
In contrast, the primary beneficiaries of the earmarked tax, the school-age population, are rapidly declining due to low birth rates. The total fertility rate dropped from the early 1990s at around 1.7 to 1.2 in the mid-2000s, and it is projected to fall to 0.75 by 2024, ranking at the bottom among Organization for Economic Cooperation and Development (OECD) member countries.
According to the Statistics Korea, the school-age population decreased sharply from 13.179 million in 1972 to 14.401 million in 1980, then to 11.383 million in 2000, and is projected to drop to 7.147 million by 2024. By 2030, it is expected to fall to 5.967 million and to 4.122 million by 2040.
Despite the continuous decline in the school-age population, there are growing concerns that earmarked tax allocations are excessively distributed, leading education offices to manage their finances inefficiently. Moreover, the earmarked tax is automatically allocated by law, making it not subject to scrutiny by financial authorities or the National Assembly.
In an audit report released in August 2023, the Board of Audit and Inspection pointed out the issue of inefficient management of grant-in-aid (earmarked tax) system operations. According to the report, the Board estimated that from 2018 to 2022, regional education offices spent 3.5 trillion won on cash and welfare support projects. The Gyeonggi Provincial Office of Education distributed 166.4 billion won as 'education recovery support funds' to all local students, regardless of income level, in 2021, while the Gyeongbuk Provincial Office of Education provided laptops worth 4.6 billion won to over 3,700 non-teaching administrative staff and educational support staff during 2021-2022.
The Board of Audit and Inspection advised the Ministry of Education to 'prepare measures, including revising the national tax allocation method, and to promote expenditure efficiency measures such as establishing proper teacher supply plans to enhance the effectiveness of education finance investment.'
However, to lower the allocation ratio of national tax, amendments to the Grant-in-aid (earmarked tax) Act are necessary. However, there is strong opposition from both the Ministry of Education and the National Assembly, making it difficult to secure the momentum for legislative changes.
A Ministry of Economy and Finance official said, 'It is necessary to review the problems for which there is a unanimous call for restructuring,' adding, 'How to secure momentum for expenditure efficiency will be key.' The official also noted, 'We will continuously request cooperation with relevant ministries and the National Assembly.'