The government will scrap the national tax linkage system for the grant-in-aid (earmarked tax) for educational finance that has been in place for 54 years and introduce a new formula that reflects the real growth rate and changes in the school-age population. The difference from the earmarked tax that could have been received under the current system will be accumulated in the Future Response Fund education and talent account and invested in early childhood, higher, and lifelong education. It also decided to make up the difference so that the earmarked tax will at least be maintained or increased from the previous year.
The overhaul is expected to face backlash during the rollout because most demands from the education sector were not accepted. The education sector has argued to keep the current system and, even if changed, to allow the Future Response Fund to be used for elementary and middle school education. If the current system is maintained without an overhaul of the earmarked tax, next year's earmarked tax is estimated to reach 100 trillion won, but under the overhaul it would decrease by about 20 trillion won.
As superintendents nationwide publicly oppose ending the national tax linkage, another variable is that for such an overhaul to move forward, the Future Response Fund bill and amendments to the National Finance Act, the Local Educational Finance Grant-in-Aid Act, and the Local Education Tax Act must pass the National Assembly as a package.
◇ Earmarked tax that used to rise automatically with revenue… calculated by reflecting growth rate and number of students
On the 21st, the Ministry of Planning and Budget and the Ministry of Education announced at the Government Complex Seoul a plan to promote the Future Response Fund containing these details.
According to the Local Government Finance Grant-in-Aid Act, 20.79% of national tax aggregates is allocated as the earmarked tax. This structure was introduced in 1971, the year after the Grant-in-Aid Act was enacted. The linkage ratio to national tax rose from 13% in 2001 to 20.46% in 2019 and has remained at the current level since 2020.
Concerns about this structure grew as national tax steadily increased with the expanding economy while the number of students decreased. Over the past 10 years, the number of students fell 18%, while the earmarked tax instead increased by nearly 80%. Some superintendents treated the earmarked tax like a storehouse, repeatedly pledging cash handouts and carrying them out once elected.
In response, the government will abolish the national tax linkage and apply a new method that multiplies the previous year's earmarked tax by the average real growth rate over the past three years and then reflects 35% of the average change in the school-age population over the past three years. While the real growth rate has steadily risen, the school-age population is on the decline. The government decided to make up the difference so the earmarked tax will not decrease from the previous year.
◇ The difference goes to the Future Response Fund… elementary and middle school education excluded from uses
The difference between what is calculated under the existing national tax-linked method and what is calculated under the new formula will go into the Future Response Fund. This account's resources will be invested in ▲early childhood education ▲higher and lifelong education ▲backfilling when the earmarked tax declines ▲attracting top talent and preventing the outflow of national talent. The fund law will include a provision barring transfers to other accounts.
However, as a rule, this account's money cannot be used for elementary and middle school education, so pushback from the education sector is expected. Jung Keun-sik, Seoul superintendent and head of the Council of Education Superintendents of the Republic of Korea, said at a news conference on the 18th, "Education offices already bear a significant part of early childhood education," and added, "In the age of artificial intelligence (AI), the linkage between elementary and middle and higher education can only be strengthened, and there are also parts of lifelong education that education offices support."
Starting with a notice of legislation on the 24th, the government plans to submit the Future Response Fund package bills to the National Assembly on Nov. 3 along with the 2027 government budget plan after a review by the Ministry of Government Legislation and a Cabinet meeting.