[Population Cliff]⑥ Paying Taxes but Government Spending Increases... "Budget Restructuring Needed"

Even with Increased Tax Revenue, Rigid Grants Drain Funds
Fiscal Innovation Difficult Without Budget Restructuring
Population Decline Accelerates but Budget Continues to Grow
Efficiency Must Be Improved by Reforming Education Grants and Public Pensions

Concerns surrounding national governance are growing as the population paying taxes decreases due to low birth rates and aging, while government expenditures steadily increase. Despite pouring in a budget amounting to 380 trillion won over the past 15 years, the birth rate has not risen and aging has only accelerated, creating a structure where outgoing funds increase and incoming funds decrease. Experts emphasize the need to restructure inefficiently managed budgets to expand the shrinking fiscal capacity.

According to the Ministry of Economy and Finance and the National Assembly Budget Office on the 27th, next year's total budget expenditure in South Korea is 639 trillion won, of which 53.5% is mandatory spending. Mandatory expenditures, such as public pensions, are legally obligated payments that the government cannot arbitrarily reduce, making them very rigid. Mandatory spending is expected to approach 80% by 2060. As the population decreases due to worsening low birth rates and mandatory spending continues to rise, fiscal deficits are bound to worsen even if tax revenues increase.

The education grant system, which continues to increase despite a decline in the number of students, is cited as a representative rigid budget that accelerates this problem. Education grants used for elementary, middle, and high school education are determined annually by adding 20.79% of domestic taxes and a portion of education tax revenues, so grants continue to increase even if the school-age population decreases. The government expects that if the current method of automatically allocating a portion of domestic taxes is replaced by a formula reflecting the decline in the school-age population, there will be fiscal capacity amounting to 34 trillion won annually. However, strong opposition centered around the National Association of Metropolitan and Provincial Superintendents of Education suggests that significant difficulties will arise before any bill amendment or enactment.

Professor Kim Woo-cheol of the Department of Taxation at the University of Seoul said, "Although tax revenues have greatly increased over the past two years due to the revitalization of the real estate and stock markets, a significant portion is lost to rigidly operated grants, so the fiscal situation still cannot avoid deficits," adding, "Partial expenditure restructuring without fiscal reform is meaningless, and tax increases should definitely not be implemented."

Public pensions, whose share is increasing due to aging, are also problematic. The government employee pension and military pension are expected to run deficits worth trillions of won next year, the private school pension is likely to turn to deficit from 2025, and the national pension from 2041. If these deficits are covered by taxpayers' money, discretionary government spending will decrease. According to the National Assembly Budget Office's long-term fiscal outlook, the proportion of discretionary spending relative to total expenditure will decrease from 53.1% in 2020 to 42% in 2040. This trend could accelerate further if population decline and sluggish growth coincide. This is why calls for pension reform, including premium adjustments and redesigning pension payment methods, are growing louder.

Experts foresee that if such population decline continues, government capacity will diminish, accelerating social disintegration and the breakdown of solidarity. Lee Sang-rim, a research fellow at the Korea Institute for Health and Social Affairs, pointed out, "If the government experiences a fiscal crisis, policy capacity will gradually weaken," adding, "The longer this situation persists, the greater the gaps and inequalities will become, potentially leading to social conflicts." Professor Kim emphasized, "Education grants were necessary in the 1970s, but not anymore," and added, "Since fiscal resources have a strong public goods nature, it is necessary to adjust the distribution method through social consensus."