Report EUR 26223 EN

2013

Esperanza Vera-Toscano

Different approaches for

monitoring education spending

towards quality assurance.

Public financing of education in EU countries: A cross-country systematic analysis

1

European Commission

Joint Research Centre

Institute for the Protection and Security of the Citizen (IPSC)

Contact information

Esperanza Vera-Toscano

Address: Joint Research Centre, Via Enrico Fermi 2749, TP 361, 21027 Ispra (VA), Italy

E-mail: esperanza.vera-toscano@jrc.ec.europa.eu

Tel.: +39 332 78 5103

Fax: +39 332 78 5733

http://ispc.jrc.ec.europa.eu/

http://www.jrc.ec.europa.eu/

Legal Notice

Neither the European Commission nor any person acting on behalf of the Commission

is responsible for the use which might be made of this publication.

Europe Direct is a service to help you find answers to your questions about the European Union

Freephone number (*): 00 800 6 7 8 9 10 11 (*) Certain mobile telephone operators do not allow access to 00 800 numbers or these calls may be billed.

A great deal of additional information on the European Union is available on the Internet.

It can be accessed through the Europa server http://europa.eu/.

JRC85259

EUR 26223 EN

ISBN 978-92-79-33745-1

ISSN 1831-9424

doi: 10.2788/33594

Luxembourg: Publications Office of the European Union, 2013

© European Union, 2013

Reproduction is authorised provided the source is acknowledged.

2

Public financing of education in EU countries: A cross-country

systematic analysis1

Different approaches for monitoring education spending towards quality

assurance.

Esperanza Vera-Toscano

Executive Summary

This policy report follows up the on-going discussion on the significant long-run positive social

and economic effects that investment in human capital may have for different countries.

However, the limitations on public finances and the current pressures on public expenditure

given the present financial crisis, make governments’ decisions to be based on the functional

composition of government expenditures rather than on the long-run welfare effects. Within

this framework, it is compulsory to assess and review the scope for possible actions so as to

enhance the quality of EU public expenditures, particularly in education, taking into account the

bounds of the different national fiscal frameworks.

With this context in mind, this report 1) reviews the composition and trends in education

expenditure (both private and public) in the EU with special attention paid to the impact of the

current economic and financial crisis; 2) briefly reports on the impact of the country’s

demographic structure on government education spending; 3) approaches the issue of quality

of education expenditure in the context of efficiency, adequacy and equity presenting a

methodology for the disaggregation of government education spending; and 4) presents a

possible way forward.

Overall, the main conclusion from this comprehensive analysis it that, given the transfer of

competences on educational policies to regional or local levels that varies from one EU country

to another, together with the significant shortages of the existing data (even less if

disaggregated by educational levels), the task of systematically monitoring governments’ public

spending becomes a complicated endeavour. Thus, we propose that monitoring of education

expenditure should not be global but centred around particular topics, such as educational

levels or areas of expenditure.

Regarding the analysis on cost factors explaining the expansion of educational services, it is

equally desirable, to undertake research on the disaggregation of education expenditure,

namely: teacher–student ratio, non-wage spending per student, and student enrolment ratio.

Updated information by educational levels and region of analysis can contribute enhancing the

1 I would like to thank Sylvain Jouhette, Andrea Saltelli, Luca Pappalardo and Catalin Dragomirescu-Gaina for

helpful comments and suggestions. Earlier work undertaken by Mircea Badescu and Massimo Loi is greatfully

acknowledged.

3

efficiency of education expenditure. Further, descriptive results provided in this report also

suggest the importance of seriously taking into account population trends when assessing

current and future levels of education expenditure.

Overall, despite the fact that this Report does not deal with the importance of collecting

information on educational “outcomes”, the provided evidence points to large potential

efficiency gains in terms of insights by simply monitoring education expenditure (i.e. “inputs”).

Thus, it is a first step toward quality assurance of public education expenditure among EU

countries.

4

Table of Contents

1. Introduction

2. Composition of education expenditure in the EU and recent evolution

2.1. Some theoretical considerations

2.2. Data description

2.3. The size of education expenditure and the share of public funding

2.4. Recent trends in the evolution of public spending in education as a percentage of

Gross Domestic Product (GDP)

2.5. The influence of changes in government expenditure capacity over general

education expenditure (GEE/GGE)

2.6. Public education spending by educational level and type of expenditure

3. Government expenditure in Education and Demography

3.1. Overview of the literature

3.2. Demographic change and public education spending

3.3. Education Expenditure per student

4. Quality of education expenditure in the EU

4.1. Efficiency, adequacy and equity: Three keywords for financing education

4.2. Disaggregating education spending: An approach to further monitor investment in

human resources, infrastructure and other education ratios.

5. Summary and Discussion: A way forward to the monitoring of education expenditure for

quality assurance.

REFERENCES

Annex I

Annex II

Tables and Figures

5

1. Introduction

Enhancement of public financing of education is important as evidence shows that

investing in human capital can have significant long-run positive social and economic effects for

the different countries (EENEE, 2010). This is why, the European Council and the European

Commission have repeatedly urged Member States to prioritise expenditure on education and

training as an “investment in future growth” and part of their fiscal consolidation programmes.

In this matter, the 2013 AGS likewise underlines2 that “Investments in education, research,

innovation and energy should be prioritised and strengthened where possible, while ensuring

the efficiency of such expenditure.” Since public finances are limited, and pressures on public

expenditure are intensifying in the context of the on-going financial crisis, governments’

decisions are quite likely to be based on the functional composition of government

expenditures that maximizes growth, and which may not necessarily mean more money for

education (Barro, 1990; Devarajan et al. 1996). Notwithstanding, the school spending decision

must be analysed as an example of the common pool problem in distributive politics (Weingast,

Shepsle & Johnsen, 1981). The benefits of each school are concentrated to a geographic area,

while the costs are financed by general taxation at a higher geographic level. Both sides of this

equation are included, municipalities fighting for schools in their area and political leaders at

the country level trying to ‘rationalise’ the externalities of the school spending decisions while

looking for efficiency gains. This is why financing education is a particularly complex and thorny

issue at all levels of education. Additionally, systematic comparison across countries of

education expenditure becomes quite a challenge given the different decision making actors,

interest groups and education levels (needless to say the idiosyncratic country differences).

With this context in mind, this report 1) reviews the composition and trends in education

expenditure (both private and public) in the EU with special attention paid to the impact of the

current economic and financial crisis; 2) briefly reports on the impact of the country’s

demographic structure on government education spending; 3) approaches the issue of quality

of education expenditure in the context of efficiency, adequacy and equity presenting a

methodology for the disaggregation of government education spending; and 4) presents a

possible way forward.

2 Annual Growth Survey (AGS) 2013, p. 5 (http://ec.europa.eu/europe2020/pdf/ags2013_en.pdf)

6

2. Composition of education expenditure in the EU and recent evolution

We devote this section of the technical report to provide updated evidence of the

composition and current trends of education expenditure in the EU, paying particular attention

to public spending (government investment). In doing so, we hope to be able to meaningfully

respond to two main questions, specifically:

1) What are the main differences in the composition of education expenditure

across the EU (by type and source of expenditure)? And, Are there any

common patterns that are presumably more supportive of potential growth?

2) From a more dynamic perspective, what were the main trends in education

expenditure and how the current economic and financial crisis has affected

the evolution?

2.1. Some theoretical considerations

Economic growth is determined through the interaction of human and physical capital

accumulation. Regarding human capital, there are many ways it can be acquired. As suggested

by Lucas (1988, 1993), on-the-job training or learning-by-doing might be the most important

ways to accumulate human capital. However, Becker (1993) argues that education during

childhood is crucial for accumulating human capital later on in life, assuming that the human

capital of adults is proportional to the amount acquired during childhood. Three institutions

are, therefore, significantly involved in the provision of education, namely: the market, the

family and the public sector (i.e. government). The need for public intervention is rationalised

through the need to correct market failures which would lead to the under-provision by the

private sector and increasing social inequality.

Having said this, it is important to take into account that, on the one hand, an increase in public

education expenditure3 reduces private costs of education, increases the proportion of skilled

individuals, and tends to promote growth. However, education spending displaces physical

capital and reduces learning-by-doing. A marginal increase in the education subsidy could also

3 Given the link between education expenditure and economic growth, this expenditure category is also referred to

as “government investment”, since it is associated to an increase in the capital stock of the economy. Thus, both

education expenditure and education investment will be used interchangeably in this report.

7

lower growth. The empirical literature on the link between government investment in

education and growth is not fully conclusive on their positive effects (Brauninger and Vidal,

2000; European Commission, 2003), nonetheless, it is yet shown that pure public education

maximizes the long-run growth rate (Arslanalp et al., 2010).

Overall, there is no optimal response to the adequate government size regarding education

investment since the macroeconomic link between the size of government and long-run growth

is not clear cut. Given the limited size of public resources, emphasis should then be put on

monitoring spending so as to ensure greater government efficiency on education investment,

and guaranteeing that it does not become a drag on the economy.

2.2. Data description

This report simultaneously uses data from the General Government of Finance and

Statistics classified by COFOG4 and the Education and Training statistics from Unesco-OECD-

Eurostat data collection (UOE), both available from Eurostat. There are strong links between

COFOG classification and the UOE data collection, as expenditure from COFOG (at the 2nd digit

level) and the UOE data collection are compiled according to the ISCED classification, thus,

some concept and definitions are common to the UOE and COFOG analysis. Additionally, UOE

Finance tables are continuously revised so as to make them more compatible with national

accounts concepts. Nonetheless, differences in the breakdown of education expenditure exist

and need to be taken into account for consistency matters. In summary, COFOG differentiates

between secondary (ISCED 2-3) and post-secondary non-tertiary (ISCED 4) education while

these two categories are gather under ‘secondary’ in UOE data.5 Further, for the education

category in COFOG ‘Education not definable by level’, as opposed to UOE data, it includes non-

formal education. Another significant difference between COFOG and UOE data is the particular

grouping of subsidiary services on education and R&D, which are allocated in UOE dataset

directly to the corresponding ISCED heading. Table 1 below briefly summarizes these

differences while Annex I provides greater details about it. In order to get the best of both

dataset, when necessary, an alert will be placed to the potential different results that may be

obtained.

4 COFOG is the acronym for Classification of the Functions of Government, which is one of the four classifications

of expenditure used in the System of National Accounts (SNA) 5 Eurostat has recently agreed to align the two groups by using ISCED 1-2 and ISCED 3-4. Thus, this approach might

change in the near future.

8

Table 1. Differences in the disaggregation of education expenditure UOE vs. COFOG

Type of Expenditure by function

UOE COFOG

Pre-primary Residual category ISCED 0 and 1

Primary ISCED 1 + % SUBS + % R&D

Secondary ISCED 2 to 3 + % SUBS + % R&D ISCED 2 to 4

Post-secondary ISCED 4 + % SUBS + % R&D

Tertiary ISCED 5 and 6 + % SUBS + % R&D ISCED 5 and 6

Education not defined by level Residual category Education not defined by level

Subsidiary services (SUBS) SUBS

R&D Education (R&D) R&D*

Education n.e.c. Residual category Education n.e.c.

* UOE includes in education expenditure any research conducted in tertiary educational institutions. On the other hand,

COFOG classifies R&D expenditure conducted in tertiary educational institutions to the respective functions (e.g. 01.4 Basic

Research, 07.5 R&D Health), and in function Education only R&D on education.

n.e.c.:”Not elsewhere classified”.

Further, we use the economic classification, which distinguishes different types of public

education expenditures including investment (i.e. gross fixed capital formation), intermediate

consumption, compensation of employees, social benefits in cash and social transfers in kind

among others.6

2.3. The size of education expenditure and the share of public funding

As mentioned earlier on, funding of education involves several actors including

governments and private entities. Using UOE data, Table 2 shows that the total expenditure

directed to educational institutions in the EU was 5.7% of GDP in 20097 compared to 7.3% for

the US. As shown in columns 5 and 6, this was mainly funded by public expenditure (86.2%),

while private sources were still responsible for 13.8% of the funding of educational institutions.

Taking into consideration the current economic and financial crisis, it is expected that greater

efforts are made by national governments in general, and educational institutions in particular

to search for alternative ways of funding education, regardless the desirable need to increase

the overall funding of institutions. In the EU, the percentage of education funding coming from

private sources ranged from close to 3% in Finland, Sweden and Romania to 31.1% in the UK for

6 For greater details see

http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-RA-11-013/EN/KS-RA-11-013-EN.PDF. 7 Data from UOE is also available for 2010 but some key countries are missing and European (EU-27) estimates

have not been reported yet, therefore, we have opted for using 2009 data.

9

Table 2. Expenditure on education as a percentage of GDP – private and public funding (2009) – UOE

data

Public and private funding of educational

institutions as % of GDP by level of education 1

Distribution of educational

institutions expenditure by

source of funds (%)

All Primary Secondary Tertiary Public Private

EU-27 5.7 (s) 1.3 (s) 2.4 (s) 1.3 (s) 86.2 (s) 13.8 (s)

Belgium 6.6 1.5 2.9 1.4 94.3 5.7

Bulgaria 4.5 0.7 1.6 1.4 85.5 14.5

Czech Republic 4.8 0.7 2.2 1.2 88 12

Denmark 7.8 2.1 2.6 1.8 95.8 4.2

Germany 5.3 0.7 2.6 1.3 85 15

Estonia 6.2 1.5 2.7 1.5 94.2 5.8

Ireland 6.3 2.3 2.3 1.6 94.2 5.8

Greece : : : : : :

Spain 5.6 1.4 2 1.3 87.1 12.9

France 6.3 1.2 2.8 1.5 90.2 9.8

Italy 4.9 1.2 2.2 1 90.7 9.3

Cyprus 8.4 2.3 3.7 1.8 81.7 18.3

Latvia 5.9 1.6 2.2 1.2 90.2 9.8

Lithuania 6.1 0.7 3 1.5 89 11

Luxembourg : 1.4 1.9 : : :

Hungary 4.8 0.8 2.1 1 100 :

Malta 6.6 1.7 3.3 1.2 80.1 19.9

Netherlands 6.2 1.5 2.6 1.7 83.5 16.5

Austria 5.9 1 2.8 1.4 91.4 8.6

Poland 5.8 1.6 2 1.5 86.7 13.3

Portugal 5.8 1.5 2.5 1.3 93.5 6.5

Romania 4.2 0.8 1.5 1.2 97.4 2.6

Slovenia 5.9 2.7 1.2 1.3 88.5 11.5

Slovakia 4.5 0.9 2.1 0.9 83.9 16.1

Finland 6.5 1.4 2.8 1.9 97.6 2.4

Sweden 6.7 1.7 2.5 1.7 97.4 2.6

UK 6 1.8 2.6 1.3 68.9 31.1

Iceland 8.1 2.6 2.6 1.3 90.8 9.2

Norway 6.1 1.9 2.2 1.4 98.1 1.9

Switzerland 5.8 1.5 2.8 1.2 89.9 10.1

Croatia 4.7 1.8 1.1 1.1 92.3 7.7

Turkey : : : : : :

United States 7.3 2 2.2 2.6 72 28

Japan 5 1.3 1.6 1.5 68.1 31.9 1 Since this is UOE data, the residual is pre-primary level on education and not allocated by level.

Flags: (s) Eurostat estimate; (: )Not available

Source: Eurostat. Education and Training data (online data codes: educ_fitotin, educ_fifunds).

10

2009, with most of that funding coming from students and their families. 8 For the sake of

equity, it is important to monitor whether the development of tuition fees (a proportion of

total private funding) is appropriately accompanied by financial support for poorer students

(For some preliminary results see Reis and Gheorghiu, 2011).

Aware of the public vs. private dimension of education expenditure, let us focus on the public

one. Thus, public spending on education includes not only the funding for schools, colleges and

universities, but also funding for institutions that provide education related services. This

includes entities that administer education (i.e. ministries or departments of education), as well

as entities providing subsidiary services related to the core activities of education

(administration, inspection, operation or support of transportation, food or lodging). Within

limited public budgets, governments must make difficult decisions on how to invest their

resources. Table 3 reports public spending on education as a proportion of total public

expenditure for 2010. For comparison purposes, results are provided using UOE and COFOG

data. Public spending on education accounted for 11% of total public expenditure in 2010. It

was highest in Cyprus (17.16%) followed by Malta (16.67%) and Denmark (15.26%) according to

UOE data. The lowest level was in Romania and Italy, with 8.79% and 8.93 respectively. Using

COFOG data, Estonia spent among the highest (16.77%) while Ireland and Greece were among

those who spent less (8.37% and 7.79%).

Further, public expenditure on education, as a percentage of government expenditure,

indicates the extent to which governments prioritise education in relation to other areas of

investment, such as health care, social security, defence or security. As can be seen in Figure 1,

the structure of government expenditure9 at the EU level has changed between 2002 and 2010.

Taking into account that overall government spending has increased under the current

8 As indicated by UOE metadata, in many countries, private expenditure on education contained in some indicators

is not comprehensive. This is in particular true for the payments of other private entities (e.g. firms, non-profit

organizations, religious institutions) to educational institutions that are often very difficult to track back through

administrative records. This can sometimes result in a significant under-evaluation of private expenditure on

education that has to be taken into account when interpreting indicators on education finance statistics.

9 COFOG classifies government expenditure into ten main categories (Divisions – seen as broad objectives of

government and known as the 'COFOG I level' breakdown): general public services; defense; public order and

safety; economic affairs; environmental protection; housing and community affairs; health; recreation, culture and

religion; education; social protection. These divisions are further broken down into 'groups' (COFOG II level). The

following headings and sub-headings of COFOG are treated as expenditures on individual consumption services

(except R&D and 'not elsewhere classified' categories): Education, Health, Social protection, recreational and

sporting services and cultural services. The remaining functions represent collective final consumption

expenditure.

11

Table 3. Public expenditure on education as a percentage of total public expenditure. 2010.

Public expenditure on education

as % of total public expenditure

UOE COFOG

EU-27 10.85 (s) 10.81

Belgium 12.51 11.63

Bulgaria 10.95 10.14

Czech Republic 9.69 11.00

Denmark 15.26 13.88

Germany 10.61 (p) 8.98

Estonia 13.96 16.77

Ireland 9.79 8.37

Greece : 7.79

Spain 10.73 10.64

France 10.37 10.80

Italy 8.93 8.84

Cyprus 17.16 16.14

Latvia 11.47 14.02

Lithuania 13.18 14.97

Luxembourg : 12.06

Hungary 9.8 11.28

Malta 16.07 13.69

Netherlands 11.65 11.39

Austria 11.2 10.84

Poland 11.38 12.43

Portugal 10.98 13.75

Romania 8.79 8.34

Slovenia 11.27 13.17

Slovakia 10.56 11.18

Finland 12.27 11.77

Sweden 13.35 13.18

UK 12.19 13.70

Iceland 14.74 16.17

Norway 15.21 12.99

Switzerland 15.46 17.95 Flags: (s) Eurostat estimate; (: )Not available; (p) provisional

Source: Eurostat. COFOG and Education and Training data (online data codes: educ_figdp, gov_a_exp).

economic crisis (from 4.6M euros in 2002 to 6.2M euros in 2010 for EU average), at the EU

level, we observe that among the government expenditure on individual consumption services,

spending on health has increased by 1 percentage point, and represented in 2010 almost 15%

of total government expenditure, while the share of the other categories (for example, social

protection or recreation) has remained constant.

However, the share of education expenditure has slightly decreased in 2010 compared to 2002,

and represented below 11% of the total government expenditure. Education took a decreasing

share of total government expenditure in most EU countries compared to 2002. In Romania,

12

Ireland, Portugal and Lithuania, there have been particularly significant shifts from education to

other sectors - the proportion of government expenditure directed to education has hence

markedly decreased in these countries (see Table 1A in the Annex II).

Figure 1. Structure of general government expenditure (2002 and 2010).

(online data code: gov_a_exp).

2.4. Recent trends in the evolution of public spending in education as a percentage of Gross

Domestic Product (GDP).

After having reviewed education expenditure composition across the EU in static terms,

this section reviews its trends over time, paying particular attention to the most recent years in

order to have some evidence on the effects of the economic and financial crisis.

Thus, public spending on education and training as a percentage of GDP is often seen as the

commitment which governments make to the provision of education reinvesting, thus, their

generated wealth in human resources and future economic growth. In this sense, Table 4 below

shows the general government expenditure on education as % of GDP and in absolute values

for the European Union (EU27).

13

Table 4. General government expenditure on education as % of GDP and in absolute values: EU27

EU 27

Government

expenditure on

education as % of GDP

Government

expenditure on

education at market

prices

(millions of Euros)

Gross Domestic

Product at market

prices

(millions of Euros)

2002 5.20 516,863.00 9,935,139.00

2003 5.26 531,608.80 10,104,053.30

2004 5.18 549,553.90 10,605,774.70

2005 5.21 577,298.40 11,072,170.80

2006 5.15 603,046.50 11,701,008.10

2007 5.08 629,931.20 12,406,198.50

2008 5.16 643,583.70 12,472,996.40

2009 5.55 652,062.80 11,754,740.00

2010 5.47 672,145.00 12,278,344.40

2011 5.34 674,662.60 12,642,849.80

Source: Eurostat (COFOG) (online code: gov_a_exp)

The average spending level of education in the EU was around 5% of GDP between 2002 and

2011 with a slight increasing trend over time, in part due to the sizeable drop in the GDP once

the economic crises started around 2008, and also because, it is well-known that public

spending on education tends to react with some time lag on economic conditions and, in

recessions, the share of GDP spent on education tends to increase because economic output is

declining more quickly than public education spending. However, some downsizing can already

be observed in 2011. If we look broader and compare these results with other international

counterparts such as the US or Japan, the level in the US is pretty similar to that of the EU

(5.40%), while this indicator varies significantly for Japan with only 3.44% of their GDP devoted

to education spending.

At the country level and during the 2002-2010 periods, government spending on education as

% of GDP was the highest in Denmark, Cyprus, Sweden and UK, while the lowest percentages

were observed in Romania and Greece. Figures 2a to 2d distinguish among countries with an

increasing trend in public financing of education as % of GDP during the mentioned period

(2002-2011), those ones with no increase/decrease trend, and those which has suffered some

decline. The fall in education expenditure during the period considered in at least sixteen

Member States (see Figures 2c and 2d), some of which are above or close to EU average shows

a trend that requests further research onto the composition of education expenditure so as to

ensure the efficient used of limited resources.

14

Figure 2a. Government expenditure on education as % GDP

2002-2010. % change >=1.5 (EU27 reference in red)

Figure 2b. Government expenditure on education as % GDP

2002-2010. % change 0.5-1

Figure 2c. Government expenditure on education as % GDP

2002-2010. % change 0-0.5

Figure 2d. Government expenditure on education as % GDP

2002-2010. % change <0 (online code: gov_a_exp)

Further interesting information is provided in Figure 3, which shows the inter-annual change in

government education expenditure (GEE) over the ten year period considered (2002-2011).

During the first year, public spending in education grew at higher rate than GDP, which

translated into an increase in expenditure as a percentage of GDP. Then, from 2004 to 2007, it

continued to grow in real terms, but at lower rates than GDP (except for 2004/2005). Finally,

between 2008 and 2011, with the beginning of the economic crisis there was a significant

decrease in GDP growth, and the EU maintained a high growth of public education expenditure,

however this growth began to decline once the lag in education expenditure adapted to budget

2

3

4

5

6

7

8

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Cyprus Ireland

United Kingdom EU27

2

3

4

5

6

7

8

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Belgium Denmark Finland

Latvia Netherlands Spain

EU27 Slovakia Greece

2

3

4

5

6

7

8

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Austria Bulgaria Estonia

France Germany Lithuania

Slovenia EU27 Luxembourg

2

3

4

5

6

7

8

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Czech Republic Hungary Italy

Malta Poland Portugal

Romania Sweden EU27

15

adjustments growth, assisting to the first decrease in government education expenditure in 10

years (-1.03%).

Figure 3. Inter-annual change of general government expenditure on education compared to GDP

(EU27)

Note: Results are reported after having deflated GDP and GEE using HICP (2005 = 100)

(online code: nama_gdp_c, gov_a_exp, prc_hicp_aind)

Notwithstanding, while the immediate conclusion would be that EU governments have

managed to secure a growth of education expenditure even in harsh times (2.17% in 2008,

0.6% in 2009 and 3.46% in 2010) that has gone above GDP growth. Nonetheless, does this

result imply an increase in government commitment to expenditure in education as proposed

by EU Institutions? To better answer this question, it is necessary, not only to describe the

trends in public financing of education (GEE), but also to test the extent to which they are

related to changes in gross domestic product (GDP) over time, and more importantly, to

changes in general government expenditure capacity (GGE/GDP), also defined as “government

size”.

2.5. The influence of changes in government expenditure capacity over general education

expenditure (GEE/GGE).

By definition, the ratio of government education expenditure (GEE) between two periods

can be separated into the product of three ratios: Gross Domestic Product (GDP) at time 2 as a

fraction of GDP at time 1; general government expenditures (GGE) as a fraction of GDP at time

2 divided by time 1; and the ratio of the fraction of GGE devoted to education (GEE/GGE) at the

two periods as follows,

2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11

GDP 1.49 2.50 2.10 3.30 3.30 0.35 -4.30 2.09 1.53

GEE 2.64 0.94 2.74 2.11 1.77 1.97 2.88 0.75 -1.03

-5.00

-4.00

-3.00

-2.00

-1.00

0.00

1.00

2.00

3.00

4.00

Inte

r-a

nn

ua

l gro

wth

16

���������� = ��������� ∙ � ��� ���� ��� ����

� ∙ � ���� ��� ���� ���� (1)

This decomposition will allow us to bring further light onto the key policy question about

government commitment to expenditure in education, as we will be able to assess the trend in

the fraction of GEE as a share of GGE and link it to government size (GGE/GDP) and GDP

evolution.

Figure 4. Inter-annual change of GEE, GDP, GGE/GDP and GEE/GGE (EU27) (online code: nama_gdp_c, gov_a_exp, prc_hicp_aind)

Figure 4 provides useful information regarding this decomposition since it updates Figure 3 for

EU27 to include both GGE/GDP (i.e. government size) and GEE/GEE (i.e. government efforts on

education expenditure). As already mentioned, results show how GDP growth alone has

systematically led to an increase in GEE expenditure, and even the drop in GDP with the start of

the crisis in 2008 has not prevented GEE for continuing growing. It is important to remember

that sluggish education expenditure adjustment is normal. However, while the size of

government as a share of GDP (GGE/GDP) has not significantly changed from 2002 to 2007

despite the GDP growth, in 2008 and 2009, there has been a significant increase in government

2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 2009/10 2010/11

GDP 1.49 2.50 2.10 3.30 3.30 0.35 -4.30 2.09 1.53

GEE 2.64 0.94 2.74 2.11 1.77 1.97 2.88 0.75 -1.03

GGE/GDP 1.25 -0.95 -0.04 -1.08 -1.43 3.31 8.39 -0.85 -2.94

GEE/GGE -0.11 -0.57 0.67 -0.07 -0.05 -1.63 -0.81 -0.47 0.43

-6.00

-4.00

-2.00

0.00

2.00

4.00

6.00

8.00

10.00

Inte

r-a

nn

ua

l ch

an

ge

17

spending due to the refunding of the financial sector and the increase in citizens’ social needs.

This has been something temporary as we are currently assisting to a significant shrinking of

“government sizes” in the EU (with about 3% decrease in 2001 with respect to 2010). Having

said this, the most policy-relevant factor to understand government’s efforts to support

education is the trend in the fraction of general education expenditure as a share of general

government expenditure (GEE/GGE). The pattern seems quite consistent (see purple line)

showing a general decline since 2002 in the efforts governments made towards publicly

financing education.

Tables 5 and 6 show the effect of the three components in which we have decompose GEE

without any statistical model. Table 5 reports the results for the four year period from 2007 to

2010. Calculations have been made by averaging GEE, GDP and GGE between each two years

(2007/08 and 2009/10) and then applying equation 1 between both periods. However, given

the lag in education expenditure reaction to budget adjustments, we have also considered a

longer period for averaging the measures (1999/04 and 2005/10) hoping to better capture

changes in the economic cycle (see Table 6). Values equal one mean that not change has taken

place between any of the two periods considered, if above one indicates that an increase has

taken place and the opposite applies for values below one (decrease).

If we focus first of Table 6 which looks at a longer period, covering economic prosperity and

recession, the ratios for GDP (column 1) indicate that even with constant fractions of GDP for

education, GDP growth alone in all countries should have led, as indeed happened, to an

increase in GEE expenditures. Regarding the size of the government as a share of GDP evidence

shows that most of the EU countries didn’t experience as much an increase than that in GDP –

ie. GDP growth was greater than that in government spending. Ireland had a 33% increase in

government size, but for the rest of countries the change was relatively small (±10%) compare

to the GDP increase.

Then, coming to the policy relevant question, which is the trend in the fraction of GEE as a

share of GGE, overall results show that no significant increase/decrease has taken place in

many EU countries for this long period. Special attention may be paid though to Ireland with a

33% government size increase and a 9% decrease in education share of public expenditure and

which situation worsen when looking at the shorter, crisis period term with a 45% increase in

government size and a 17% decrease in public education support. The picture does not vary

much when looking to the crisis period (Table 5). While it is true that the ratios for GDP and GEE

have significantly reduced, the figures remain more or less similar for the other two ratios.

18

Table 5. Analysis of trends from 2007-2008 and 2009-2010 for government education

expenditure (GEE); share of general government expenditure spent on education

(GEE/GGE); share of gross domestic product spent by government (GGE/GDP); and gross

domestic product (GDP) by country.

GDP GGE/GDP GEE/GGE GEE

Austria 1.01 1.08 1.01 1.10

Belgium 1.02 1.09 0.99 1.09

Bulgaria 1.07 1.00 1.02 1.10

Cyprus 1.04 1.11 1.01 1.16

Czech Republic 1.02 1.08 1.00 1.10

Denmark 0.99 1.13 1.04 1.16

Estonia 0.87 1.17 0.95 0.96

European Union (27 countries) 0.97 1.10 0.98 1.03

Finland 0.96 1.15 0.98 1.09

France 1.00 1.07 1.01 1.08

Germany 0.99 1.10 0.99 1.08

Greece 0.99 1.06 0.93 1.00

Hungary 0.92 1.01 1.01 0.94

Ireland 0.86 1.45 0.83 1.00

Italy 0.98 1.06 0.96 1.00

Latvia 0.83 1.18 0.88 0.86

Lithuania 0.89 1.18 1.00 1.04

Luxembourg 1.01 1.16 1.01 1.19

Malta 1.07 1.00 1.06 1.12

Netherlands 1.00 1.12 0.98 1.09

Poland 0.99 1.05 0.94 0.97

Portugal 1.00 1.14 0.87 0.99

Romania 0.92 1.05 0.84 0.81

Slovakia 1.08 1.18 1.02 1.30

Slovenia 0.99 1.15 0.96 1.08

Spain 0.98 1.14 0.97 1.09

Sweden 0.96 1.04 1.01 1.00

United Kingdom 0.85 1.11 1.00 0.94

Note: Values are calculated following equation:

������������������������ = �������������������������� ∙ ���� ���� ������������ ���� ���������

� ∙ ���� ���� ������������ ���� ����������

(online code: nama_gdp_c, gov_a_exp, prc_hicp_aind)

19

Table 6. Analysis of trends from 1999-2004 and 2005-2010 for government education

expenditure (GEE); share of general government expenditure spent on education

(GEE/GGE); share of gross domestic product spent by government (GGE/GDP); and gross

domestic product (GDP) by country. LONG TERM

GDP GGE/GDP GEE/GGE GEE

Austria 1.25 0.97 1.01 1.22

Belgium 1.26 1.02 1.01 1.30

Bulgaria 1.91 0.95 1.03 1.88

Cyprus 1.47 1.10 1.03 1.65

Czech Republic 1.77 0.96 1.06 1.78

Denmark 1.24 0.98 0.99 1.21

Estonia 1.90 1.05 0.91 1.83

European Union (27 countries) 1.24 1.02 0.99 1.18

Finland 1.24 1.03 0.97 1.25

France 1.23 1.03 0.94 1.19

Germany 1.13 0.97 1.01 1.11

Greece 1.41 1.07 1.15 1.71

Hungary 1.50 1.03 0.97 1.47

Ireland 1.39 1.33 0.91 1.62

Italy 1.20 1.04 0.94 1.17

Latvia 1.97 1.07 1.00 2.13

Lithuania 1.86 1.06 0.93 1.74

Luxembourg 1.52 0.99 1.00 1.53

Malta 1.28 1.01 0.97 1.24

Netherlands 1.26 1.03 1.02 1.32

Poland 1.60 1.00 0.97 1.48

Portugal 1.23 1.10 0.88 1.18

Romania 2.43 1.05 1.04 2.67

Slovakia 2.14 0.84 1.26 2.30

Slovenia 1.42 0.99 1.01 1.41

Spain 1.45 1.07 0.99 1.52

Sweden 1.20 0.95 1.02 1.17

United Kingdom 1.12 1.16 1.03 1.33

Note: Values are calculated following equation:

������ ����������������! = ������� ����������������!� ∙ ���� ���� ��� �������� ���� ��������!

� ∙ ���� ���� ��� �������� ���� ��������!�

(online code: nama_gdp_c, gov_a_exp, prc_hicp_aind)

Figure 5 represents the values of columns 3 from Tables 5 and 6 so as to show countries trends

in their government commitment towards education (both in the short and long runs). To

summarize, values above 1 indicate greater commitment while those below 1 explain a

decreasing trend. Overall, these results let us conclude that despite the economic cycle a

country is in, it does not seem to exist a clear commitment towards supporting public education

expenditure.

20

Figure 5. Short and long-term changes in government commitment towards education

(GEE/GGE).

2.6. Public education spending by educational level and type of expenditure

Let us now have a look to a couple of important issues that need to be brought into the

discussion. These are government expenditure by educational level and, by economic

classification.

First, the proportion of a country’s financial resources devoted to different educational levels

is the result of choices made by governments, enterprises, and individual students and their

families, and it is partially influenced by the country’s demography and enrolments at each

level. Therefore, the common larger share of public expenditure on education below tertiary

level is mainly due to near-universal enrolment rates at those levels, and also because private

expenditure tends to be greater at the tertiary level.10 Notwithstanding, it is appropriate to

introduce for further discussion in Section 3, the significant decrease in the enrolment in

primary and secondary education in a number of Member States

(http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/School_enrolment_and_earl

y_leavers_from_education_and_training). This decreasing trend is likely to impact the

10 Private expenditure provided as loans to students are treated as financial transactions in the national accounts

and thus not taken into account in the COFOG data. Half of the EU countries makes use of student loans and some

relied heavily on this form of support in 2008 (in the UK, they represented 69% of the financial aid to students

while in Belgium, Italy and Lithuania the loans accounted for less than 1%).

0.6

0.8

1

1.2

Au

stri

a

Be

lgiu

m

Bu

lga

ria

Cyp

rus

Cze

ch R

ep

ub

lic

De

nm

ark

Est

on

ia

EU

27

Fin

lan

d

Fra

nce

Ge

rma

ny

Gre

ece

Hu

ng

ary

Ire

lan

d

Ita

ly

Latv

ia

Lith

ua

nia

Luxe

mb

ou

rg

Ma

lta

Ne

the

rla

nd

s

Po

lan

d

Po

rtu

ga

l

Ro

ma

nia

Slo

va

kia

Slo

ve

nia

Sp

ain

Sw

ed

en

Un

ite

d…

GEE/GGE 2002-2011

GEE/GGE 2008-2011

21

composition and size of education expenditure among those countries. Attention will be paid to

this matter, later on in the report (Section 3.2).

Table 7. Government expenditure by level of education. COFOG data

2002 2010

Pre-

primary

and

primary Secondary Tertiary

Pre-

primary

and

primary Secondary Tertiary

United Kingdom 43.2 40.5 16.2 40.4 44.2 15.4

Sweden 58.8 19.1 22.1 60.6 19.7 19.7

Spain 40.0 37.5 22.5 40.0 37.8 22.2

Slovenia 38.3 41.7 20.0 38.3 41.7 20.0

Romania 34.3 42.9 22.9 31.0 37.9 31.0

Portugal 45.6 35.1 19.3 32.1 41.5 26.4

Poland 40.0 34.5 25.5 38.0 32.0 30.0

Malta 30.0 48.0 22.0 29.4 51.0 19.6

Luxembourg 47.5 50.0 2.5 47.5 45.0 7.5

Lithuania 19.6 60.8 19.6 20.0 56.0 24.0

Latvia 36.7 46.9 16.3 42.0 40.0 18.0

Italy 40.5 50.0 9.5 40.0 50.0 10.0

Ireland 33.3 38.1 28.6 40.7 37.0 22.2

Hungary 57.9 13.2 28.9 40.0 40.0 20.0

Greece 37.5 41.7 20.8 35.3 41.2 23.5

Germany 28.9 50.0 21.1 28.9 47.4 23.7

Finland 24.6 43.9 31.6 21.3 47.5 31.1

Estonia 33.9 45.2 21.0 41.4 34.5 24.1

Czech Republic 11.1 62.2 26.7 11.9 64.3 23.8

Cyprus 35.6 44.4 20.0 36.5 39.7 23.8

Bulgaria 21.9 53.1 25.0 21.1 52.6 26.3

Austria 29.2 52.1 18.8 30.6 53.1 16.3

Source: COFOG. Eurostat. (online codes: gov_a_exp)

In summary, as expected and shown in Table 7, the majority of EU countries allocated most part

of their government expenditure (public) to education below the tertiary level (ISCED levels 0 to

4); less than a quarter of government expenditure went to tertiary education. However, it is

important to highlight that in countries like Poland and Romania, where the enrolments at the

tertiary level went up considerably in the past years, the proportion of government spending at

this level has subsequently increased to allocate about 30% of their government education

funding to tertiary institutions (similar to Finland) whereas this share was 8% in Luxembourg

22

and 10% in Italy. Results comparing COFOG and UOE data in 2010 are reported in Table 2A in

Annex II showing close similarities in the interpretation of results.

Table 8. Distribution of government spending by type of expenditure (in %). All education in 2011

P2 D1

D7Co D62_D6311

_D63121_D63131

P5 Other

EU-27 16.98 62.26 7.55 3.77 7.55 1.89

Belgium 11.29 82.26 1.61 1.61 4.84 -1.61

Bulgaria* 25.00 63.89 2.78 : 5.56 :

Czech Republic 22.45 55.10 4.08 0.00 14.29 4.08

Denmark 21.79 58.97 1.28 12.82 5.13 0.00

Germany 18.60 58.14 9.30 2.33 6.98 4.65

Estonia 23.08 55.38 3.08 4.62 15.38 -1.54

Ireland 13.46 65.38 5.77 5.77 7.69 1.92

Greece 7.32 85.37 0.00 0.00 4.88 2.44

Spain 10.64 70.21 4.26 12.77 4.26 -2.13

France 11.67 66.67 6.67 5.00 6.67 3.33

Italy 9.52 76.19 4.76 0.00 2.38 7.14

Cyprus 6.94 73.61 2.78 9.72 6.94 0.00

Latvia 21.05 59.65 0.00 5.26 12.28 1.75

Lithuania 17.24 68.97 1.72 3.45 10.34 -1.72

Luxembourg 9.80 64.71 7.84 1.96 11.76 3.92

Hungary 21.15 51.92 11.54 5.77 9.62 0.00

Malta 6.90 63.79 12.07 6.90 8.62 1.72

Netherlands 20.69 58.62 0.00 5.17 10.34 5.17

Austria 16.07 67.86 5.36 3.57 3.57 3.57

Poland 14.55 67.27 3.64 3.64 10.91 0.00

Portugal 9.52 71.43 1.59 7.94 7.94 1.59

Romania 12.20 46.34 2.44 2.44 9.76 26.83

Slovenia 17.91 61.19 5.97 5.97 5.97 2.99

Slovakia 20.00 60.00 5.00 5.00 7.50 2.50

Finland 21.88 50.00 12.50 7.81 7.81 0.00

Sweden 19.12 50.00 2.94 17.65 4.41 5.88

UK 24.62 43.08 21.54 3.08 9.23 -1.54

Iceland 28.40 58.02 2.47 0.00 4.94 6.17

Norway 17.86 58.93 3.57 7.14 8.93 3.57

Switzerland 19.67 63.93 3.28 1.64 6.56 4.92

P2: intermediate consumption; D1: compensation of employees; D7Co: Other current transfers

consolidated; D62_D6311_D63121_D63131: social benefits in cash and social transfers in kind;

P5: gross fixed capital formation.

Source: COFOG. Eurostat. (online codes: gov_a_exp)

Lastly, moving to the economic classification of public education expenditure we have used

COFOG approach which distinguishes different types of public education expenditures including

investment (i.e. gross fixed capital formation – P5), intermediate consumption (P2),

compensation of employees (D1), social benefits in cash and social transfers in kind

23

(D62_D6311_D63121_D63131) among others.11 Results for 2011 are provided in Table 8.

Compensation of employees (D1) is the largest type of education expenditure ranging from

above 85% for Greece to 43% for the UK. This type of expenditure does not refer exclusively to

teachers’ salaries but to the total remuneration, in cash or in kind, paid by government to its

employees.

Special attention should be paid to both intermediate consumption (P2) and gross capital

formation (P5). Overall, the country ranking is quite different across the two measures. Gross

capital formation is higher among recently acceded Member States of Central and Eastern

Europe (Czech Republic, Estonia, Latvia, Lithuania and Poland), underlining the importance of

catching-up dynamics. This is countries with a comparatively lower level of economic

development tend to exhibit larger levels of investments in their attempt to meet the level of

capital stock of more advanced economies. On the other hand, no clear pattern is found

regarding intermediate consumption, which is the value of the goods and services consumed by

government such as building rentals, office consumables or energy. Similar results are found

both for the newly arrived countries mentioned above and well developed economies such as

UK, Germany, Denmark, the Netherlands, Finland or Sweden (all of them around 20%).

3. Government expenditure in Education and Demography

While public expenditure as a percentage of GDP or of GGE may be a good measure of the

efforts made by countries to support their education systems, these financial resources can be

used on pupil and student populations of very different sizes and in countries with very

different on-going demographic changes. Thus, in order to assess the appropriateness of

government education expenditure is important to account for the composition of the student

population and its trends. The effects of a decline/increase in the number of students on

education finance needs to be pretty much taken into account when monitoring education

spending.

11 For greater details see

http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-RA-11-013/EN/KS-RA-11-013-EN.PDF.

24

3.1. Overview of the literature

The literature about the effects of the demographic composition and demographic

changes on education finance can be divided into two groups. The first group discusses how

education spending varies in response to a change in the number of students, while the second

group specifically examines potential competition for public funding between different interest

groups. In this regard, the rivalry between the elderly and younger segments of the population

has widely been studied in the literature. More than a decade’s worth of theoretical and

empirical literature has been published on the potential conflict between older and younger

sectors of the population with regard to the allocation of public funds (see South 1991 or Hoyt

& Toma 1993 in the early 90s). Poterba (1996, 1997 & 1998) pointed out however that this

relationship is so complex that theoretical models are not a reliable basis for accurate outcome

prediction (see also Gradstein & Kaganovich 2003).

Further, the competition for public funds (we are considering public financing of education) sets

out another area of rivalry between other interest groups whose differences are not necessarily

based on age. Baum and Seitz (2003), for example, investigated the hypothesis that increased

social welfare spending competes with spending on education.

In any case, it is important to keep in mind that almost all studies indicate that the educational

system is slow to adapt cyclical fluctuations in current school population.12 An indicator of this

singularity in the educational system is observed with respect to fluctuations in class size. In

response to fluctuating numbers of students, existing input factors (i.e. number of teachers) are

held initially constant whenever possible while the number of students per teacher increases or

decreases. To some extent, this delay in adapting to changes in the number of students makes

sense. Teachers and school buildings cannot adapt quickly to short-term fluctuations without

major expense. Buildings cannot be sold or purchased overnight, and teachers which are

specialists employees fully trained for it, cannot be easily integrated into other sectors and

occupations in the economy in general. This means a short-term increase in demand for

teachers only stays in medium term through the formation of new people. Nor is firing teachers

a useful reaction in response to a decrease in the number of students; giving the difficulties for

recruiting them later on a short-notice (for empirical analysis see Baum and Seitz, 2003).

12 Hanushek & Rifkin (1997)’s calculations for the USA show for instance that the number of school-age children in

that country declined by five million in the period from 1970 to 1990, while educational spending did not decline

despite a shortage of public funds, automatically resulting in a steady increase in spending per student.

25

Besides these factors’ inelasticity concerning educational input production, there is empirical

evidence showing a trend (See, e.g. Falch and Rattso 1996) to re-channel the resources released

by a decline in school age population for consumption elsewhere in the education system. This

automatically increases the total cost of education per student, which may promote further

inefficiencies in the education system especially when the correlation between school

resources and student performance proves to be very small as shown by Sutherland et al. 2007.

3.2. Demographic change and public education spending

The literature review showed that many of the issues pertaining to the determination of

educational spending cannot be answered in theory but only on the basis of empirical

observation, if indeed at all. It is therefore impossible to formulate definite, clear-cut

hypotheses on the relationships and interactions between individual variables and educational

spending.

The purpose of this section is to provide additional data and approaches which can help

monitor government education expenditure while providing motivation for more thorough

empirical research. Thus, for example, Figures 7 and 8 provide detailed information on the level

of investment on education at pre-primary and primary, and secondary levels (expenditure as a

proportion of GDP) taking into account the number of school age citizens in each country (not

enrolment rates). Of course, these tables should be used as a proxy of education expenditure

per student. Not only the age structure of the population, but also legal requirements

concerning the compulsory education in each country, and the straight availability of

educational resources will ultimately influence how much money finally goes to each student in

each country. Nonetheless, for comparison among EU countries this approach seems to work as

a tool to further disentangle the behaviour of public education finance. In this sense, for pre-

primary and primary education levels, we observe how countries like Sweden and Denmark,

with population sizes similar to Ireland, Hungary, Portugal or Greece invested in 2010 double or

more than double in these levels of education than the latter ones. Finland is the country that

devoted the largest amount of its GDP in 2010 to secondary education in relation to the size of

its population. This information must be analysed with caution since only one year is

considered but already throw some light on at least two issues: 1) The role that national income

plays as a key determinant of government education expenditure; and 2) It further highlights

the importance of disaggregating by education levels when looking at the determinants of GEE

26

since significant differences may exist and a permanent reallocation of funds is likely to be

taking place.

Figure 7. Population aged up to 9 years old and % of GDP devoted to pre-primary and primary education

(2010) Source: COFOG. Eurostat. (online codes: gove_a_exp, demo_pjan_group)

Austria

Bulgaria

Cyprus

Czech Republic

Denmark

Estonia

Finland

France

GermanyGreece

Hungary

Ireland

Italy

Latvia

Lithuania

Luxembourg

Malta

NetherlandsPoland

Portugal

Romania

Slovenia

Spain

Sweden

UK

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0.04

0.045

0 2000000 4000000 6000000 8000000 10000000 12000000 14000000

27

Figure 8. Population aged between 15 and 19 years old and % of GDP devoted to secondary education

(2010) Source: COFOG. Eurostat. (online codes: gove_a_exp, demo_pjan_group)

One other approach that may also contribute the discussion about the size and quality of

education expenditure would be the link between the trends on education expenditure and

expected population changes by age groups in future years. Linking current trends in education

expenditure to population forecasts may alert policy makers about any anomalous deviation

that may cause significant changes in the amount of money spent per potential student. Results

are reported in Table 9. Based on data availability, changes in education expenditure are

reported for the long period of 2002 to 2010, and the short one from 2008-2010 with the idea

of catching up possible economic/financial crisis effects. Firstly, looking at the share of overall

government expenditure devoted to public education expenditure (columns 1 and 2) shows

that sixteen member states have systematically been shrinking the share of government

spending devoted to education. Particularly significant have been the decrease in importance in

countries such Ireland, Romania and Latvia and to a lesser extent Lithuania and Estonia.

Bulgaria, Greece, Poland or Spain have suffered a significant reduction from 2008 to 2010 which

deserve further attention too. Second, the disaggregation by educational levels provides

Austria

Bulgaria

Cyprus

Czech Republic

Denmark

Estonia

Finland

France

Germany

Greece

Hungary

Ireland ItalyLatvia

Lithuania

Luxembourg

Malta

Netherlands

Poland

Portugal

Romania

Slovenia

Spain

Sweden

0

0.005

0.01

0.015

0.02

0.025

0.03

0.035

0 500000 1000000 1500000 2000000 2500000 3000000 3500000 4000000 4500000 5000000

28

Table 9. Trends in education expenditure by educational level (% change – growth rate) and population projections by age group (2010-2025). Government

expenditure on

education1

Secondary Post-

secondary

Tertiary

% change % change % change % change

2002-10 2008-10 Age 10-

14

Age

15-19

Age 20-

24

Austria 0.00 -0.04 -0.03 0.00 -9.22 0.00 0.00 -15.59 -0.13 -0.15 -7.87

Belgium -0.24 -0.22 . . 13.55 . . 4.31 . . 0.58

Bulgaria 0.44 -0.59 0.81 -0.27 14.07 . . -14.10 0.35 0.16 -36.62

Cyprus 1.26 0.00 0.36 0.04 4.41 0.00 0.00 -24.46 0.92 0.39 -27.88

Czech

Republic

-0.09 0.13 -0.08 -0.05 28.64 -0.02 0.00 -4.55 -0.17 0.01 -25.75

Denmark -0.14 0.44 0.28 0.31 -6.84 0.00 0.00 -3.76 -0.03 0.05 5.63

Estonia -2.25 -0.15 -2.99 -0.32 26.43 0.10 0.20 -7.93 0.36 -0.09 -39.95

Finland -0.76 -0.21 0.23 -0.21 5.76 0.01 0.01 -7.27 -0.37 0.07 -7.13

France -0.61 0.23 -0.59 -0.05 5.24 0.01 0.01 3.30 0.26 0.31 -0.64

Germany 0.26 -0.03 -0.41 -0.29 -14.62 -0.01 -0.01 -18.65 0.25 0.06 -20.38

Greece 1.30 -0.35 0.60 -0.03 12.79 0.00 0.00 5.50 0.54 -0.17 -9.63

Hungary 0.27 0.61 2.73 1.19 -4.38 0.07 0.07 -17.56 -0.34 -0.01 -21.49

Ireland -4.96 -4.08 -1.71 -1.20 31.10 -0.22 -0.18 35.52 -1.81 -1.18 12.69

Italy -1.05 -0.21 -0.56 -0.17 4.93 -0.05 0.00 4.66 -0.05 -0.04 3.79

Latvia -2.10 -2.81 . -1.03 12.67 . 0.00 -22.35 . -0.44 -46.58

Lithuania -2.47 -0.56 -2.06 0.18 -2.21 -0.71 0.09 -33.93 0.09 -0.06 -45.96

Luxembourg 0.58 0.21 -0.53 -0.39 7.34 -0.02 0.01 7.10 0.54 0.17 14.49

Malta -0.27 1.56 0.04 0.02 -11.51 0.08 0.12 -24.05 -0.29 0.54 -28.80

Netherlands -0.33 -0.40 0.08 -0.11 -5.85 0.00 0.00 -7.22 -0.08 -0.15 3.75

Poland -1.32 -0.84 -0.73 -0.08 1.76 0.00 -0.01 -23.26 0.17 -0.41 -39.59

Portugal -1.74 -0.19 0.79 0.62 -8.91 0.00 0.00 -3.06 -0.52 -0.08 -1.21

Romania -3.11 -3.04 . -1.00 -4.34 . 0.01 -13.99 . -1.12 -38.44

Slovakia 3.10 1.22 . . 4.50 . . -22.74 . . -36.20

Slovenia -0.85 -0.61 -0.56 -0.28 21.64 0.00 0.00 2.26 -0.25 -0.06 -25.38

Spain -0.56 -0.48 -0.27 -0.25 18.67 -0.02 0.00 18.41 -0.28 -0.07 -0.64

Sweden 0.07 -0.05 0.17 -0.05 23.22 0.01 -0.01 -7.40 -0.25 0.07 -8.67

United

Kingdom

-0.04 0.31 0.73 0.39 13.59 -0.16 0.19 0.49 0.10 0.00 -8.99

1 Government expenditure on education refers to the share of overall expenditure on education on overall government expenditure (GEE/GGE).

Source: Population statistics and COFOG99. Eurostat. (online codes: gov_a_exp, proj_10c2150p)

further information about where governments have decreased their efforts on funding

education. Thus, for example, we can see how Germany which has more or less maintain its

government expenditure in education has decrease the share for funding secondary education

while increased its effort on tertiary education funding. Lastly, the table further provide

interesting information of the population forecast for those age groups which are likely to enter

the educational levels considered in the future. Thus, we can question if the decrease in 1.20

per cent points in secondary education spending in Ireland is likely to affect the quality of

education at that level given the potential growth of population aged 10-14 in that country in

29

the coming years. Alternatively, in the context of public spending efficiency, we could also look

for explanations at the significant decrease in the forecast of population aged 20-24 in Germany

and the continuous increase in government efforts to fund tertiary education. In summary, not

only the current population age structure but future trends can also contribute further insights

towards a better understanding of government education expenditure.

Unfortunately, income and population structure do not seem to be the only determinants of

public education spending. Thus, for example, political science literature argue that

government structure including the number of ruling parties and their strength are very likely

to affect the education budget. Finding out more about the determinants of education

spending will certainly help understanding how government allocate the resources from their

budgets. What is more, in the case of variables in which governments have little room for

manoeuvre, they could be one of the factors that explain the different countries behaviour.

However, this analysis should be done by educational level and quite often not at national level

but regional one (for an example, see Grob and Wolter, 2005), since most of the decision will

probably be taken at regional level in those countries where the education budget has been

transferred to. The lack of data available at country level that is fully comparable (even less at

regional level) prevents us from doing this type of analysis.

3.3. Education Expenditure per student

When monitoring the performance of the education systems and how this relates to the

financial resources made available to them, ultimately, the most important step is to be able to

assess the expenditure per pupil or student. Thus, the direct expenditure on educational

institutions, funded either by public or private funds, is used as a measure of the financial

resources which are really made available to the student. Further, since expenditure on

educational institutions is connected to the provision of educational programmes, when

measured by student is also more likely connected to the quality of the education provided.

For 2010, the annual expenditure on public institutions in the EU, from primary to tertiary

education, was 6847.60 EUR (PPS -Purchasing Power Standards) per student (Table 10). It

ranged from 2562.30 EUR PPS in Bulgaria to 10850.2 EUR PPS in Cyprus. In general, the

expenditure per student increases with the level of education and the cost per student at

tertiary level were higher than for other educational levels in most other countries. Likewise,

secondary education does not always cost more than primary. In Latvia, Poland, Slovenia and

30

Table 10. Annual expenditure on public educational institutions by level of education. 2010

All Primary

Secondary Tertiary Tertiary/Primary

ratio

EU-27 6,847.60* 5,778.80 6,703.60 9,954.70 1.7

Belgium 8,865.40 7,776.20 9,183.60 12,568.20 1.6

Bulgaria 2,562.30 2,014.40 2,238.70 3,515.30 1.7

Czech Republic 4,761.90 3,156.30 4,981.70 6,671.10 2.1

Denmark 9,972.00 8,980.40 9,260.10 14,823.70 1.7

Germany : : : : :

Estonia 4,179.70 3,910.90 4,961.50 8,504.60 2.2

Ireland 8,228.20 6,457.60 8,652.30 12,329.90 1.9

Greece : : : : :

Spain 7,861.40 6,401.30 8,515.90 10,681.00 1.7

France 7,667.20 5,320.60 8,944.70 12,164.60 2.3

Italy 6,698.80 6,389.90 6,629.40 7,292.10 1.1

Cyprus 10,850.20 8,884.30 11,385.10 21,777.30 2.5

Latvia 3,436.90 3,576.10 3,387.60 2,910.90 0.8

Lithuania 3,749.50 3,438.10 3,235.90 5,290.30 1.5

Luxembourg : 16,895.90 14,117.70 : :

Hungary 4,231.80 3,587.20 3,414.70 6,490.30 1.8

Malta 7,832.50 6,314.30 7,722.80 11,719.00 1.9

Netherlands 7,944.50 6,108.70 8,056.10 12,870.50 2.1

Austria : : : : :

Poland : : : 6,828.90 :

Portugal 6,151.30 4,561.20 6,841.30 8,148.10 1.8

Romania 2,185.40 1,683.10 1,698.10 4,016.90 2.4

Slovenia 6,671.10 6,880.30 6,198.20 7,522.60 1.1

Slovakia 4,202.50 4,348.80 3,728.90 5,317.50 1.2

Finland 7,365.30 5,859.40 6,979.00 14,218.80 2.4

Sweden 8,437.40 7,718.20 7,788.60 15,391.90 2

UK 6,738.70 6,577.20 7,059.80 : :

Iceland 7,266.00 7,387.80 5,907.20 6,837.90 0.9

Norway 10,647.10 9,462.00 10,578.60 15,682.30 1.7

Switzerland 9,865.00 8,868.10 9,152.40 16,863.10 1.9

US 10,938.70 8,992.60 9,703.60 18,446.70 2.1

Japan 7,914.00 5,999.70 7,399.40 20,455.30 3.4

* Per full time equivalent student in EUR

Source: Education and training. Eurostat. (online code: educ_fitotin)

Slovakia, primary education costs more per pupil than secondary education. In tertiary

education13, Cyprus, Sweden and Denmark had the highest expenditure per student in the EU,

with figures very close to that of the US in 2010. Latvia, Bulgaria and Romania did not reach

5000 PPS. Last, column in Table 10 reports how much more public money was spent per

student in tertiary educations institutions as opposed to primary education. Countries like

13 Expenditure per student in tertiary education includes R&D expenditure, which in many countries makes up a

significant part.

31

Czech Republic, Estonia, France, Cyprus, the Netherlands, Romania, Finland or Sweden spend

twice more in tertiary than in primary education. This issue of public Investment in post-

compulsory education (i.e. tertiary) deserves a further word in this document given the not

obligatory character of this type of education and therefore, the potential smaller group of

population that is likely to enjoy higher education. Incentives for society to invest in higher

education are well documented in the literature ranging from reduced public expenditure on

social welfare programmes to revenues earned through taxes paid once individuals access the

labour market. However, unlike private returns, public returns cannot be used to guide

government decisions on investment in education directly. Solely the comparison of them both

(private and public) will provide insights to governments to design appropriate financing

schemes (see OECD, 2013 for further information on this topic).

Further, Figures 9a to 9d provide interesting information about the evolution of public spending

per student (PPS) compared to each country GDP having the EU average as a reference. So the

interpretation of these figures is such that we can see which countries have spent above or

below EU average for overall education and by education level in 2002, 2008 and 2009. Thus,

for overall education we observe that countries like Belgium, Denmark, France, Portugal, Spain

and Sweden have systematically spent more than EU average. These efforts are especially

larger for primary and secondary levels in the case of Belgium, for primary levels in the case of

Denmark, for secondary education in the case of Portugal, Spain and France and Tertiary

education for the case of Sweden.

Simultaneously, we have countries like Italy which invested significantly above EU levels in

primary education, but invested below EU levels in tertiary education. Since we are using PPS

data, results are not suitable for dynamic comparisons; however Ireland seems to be

approaching EU average in all education levels since it is not expected that the significant

change that has taken place between 2002 and 2010 is only due to price changes.

Especially interesting are the level of expenditure per student by non-EU countries like Japan or

USA for tertiary education which are always above the EU average. These tables can be used by

country expert to better understand the efforts made per student by education level and the

trends each country is following compared to the EU-27.

32

Figure 9a. Index of expenditure in public institutions per full time equivalent student compared to GDP

per country (EU27==100). All education.

Figure 9b. Index of expenditure in public institutions per full time equivalent student compared to GDP

per country (EU27==100). Primary (ISCED 1). (online code: educ_fitotin)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0B

elg

ium

Bu

lga

ria

Cro

ati

a

Cy

pru

s

Cze

ch R

ep

ub

lic

De

nm

ark

Est

on

ia

Fin

lan

d

Fra

nce

Ge

rma

ny

Gre

ece

Hu

ng

ary

Ire

lan

d

Ita

ly

Jap

an

Latv

ia

Lith

ua

nia

Luxe

mb

ou

rg

Ma

lta

Ne

the

rla

nd

s

Po

lan

d

Po

rtu

ga

l

Ro

ma

nia

Slo

va

kia

Slo

ve

nia

Sp

ain

Sw

ed

en

Un

ite

d K

ing

do

m

Un

ite

d S

tate

s

All education

2002

2009

2010

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

Be

lgiu

m

Bu

lga

ria

Cro

ati

a

Cy

pru

s

Cze

ch R

ep

ub

lic

De

nm

ark

Est

on

ia

Fin

lan

d

Fra

nce

Ge

rma

ny

Gre

ece

Hu

ng

ary

Ire

lan

d

Ita

ly

Jap

an

Latv

ia

Lith

ua

nia

Luxe

mb

ou

rg

Ma

lta

Ne

the

rla

nd

s

Po

lan

d

Po

rtu

ga

l

Ro

ma

nia

Slo

va

kia

Slo

ve

nia

Sp

ain

Sw

ed

en

Un

ite

d K

ing

do

m

Un

ite

d S

tate

s

Primary (ISCED 1)

2002

2009

2010

33

Figure 9c. Index of expenditure in public institutions per full time equivalent student compared to GDP

per country (EU27==100). Secondary (ISCED 2-4).

Figure 9d. Index of expenditure in public institutions per full time equivalent student compared to GDP

per country (EU27==100). Tertiary (ISCED 5-6). (online code: educ_fitotin)

0.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

160.0

180.0

200.0

Be

lgiu

m

Bu

lga

ria

Cro

ati

a

Cy

pru

s

Cze

ch R

ep

ub

lic

De

nm

ark

Est

on

ia

Fin

lan

d

Fra

nce

Ge

rma

ny

Gre

ece

Hu

ng

ary

Ire

lan

d

Ita

ly

Jap

an

Latv

ia

Lith

ua

nia

Luxe

mb

ou

rg

Ma

lta

Ne

the

rla

nd

s

Po

lan

d

Po

rtu

ga

l

Ro

ma

nia

Slo

va

kia

Slo

ve

nia

Sp

ain

Sw

ed

en

Un

ite

d K

ing

do

m

Un

ite

d S

tate

s

Secondary (ISCED 2-4)

2002

2009

2010

0.0

50.0

100.0

150.0

200.0

250.0

Be

lgiu

m

Bu

lga

ria

Cro

ati

a

Cy

pru

s

Cze

ch R

ep

ub

lic

De

nm

ark

Est

on

ia

Fin

lan

d

Fra

nce

Ge

rma

ny

Gre

ece

Hu

ng

ary

Ire

lan

d

Ita

ly

Jap

an

Latv

ia

Lith

ua

nia

Luxe

mb

ou

rg

Ma

lta

Ne

the

rla

nd

s

Po

lan

d

Po

rtu

ga

l

Ro

ma

nia

Slo

va

kia

Slo

ve

nia

Sp

ain

Sw

ed

en

Un

ite

d K

ing

do

m

Un

ite

d S

tate

s

Tertiary (ISCED 5-6)

2002

2009

2010

34

4. Quality of education expenditure in the EU

4.1. Efficiency, adequacy and equity: Three keywords for financing education

When making decisions regarding educational finance, policy makers should be able to

reasonably respond to three policy questions, namely: adequacy, efficiency, and equity.

Adequacy refers to the level of investment that is required to meet a given standard. Efficiency

refers to the ability to reach a given level of educational effectiveness at the least sacrifice in

terms of the value of resources required. Finally, equity refers to fairness or justice in the

distribution of educational access, resources, and outcomes. In summary, who receives access

to educational opportunities and quality educational resources and results? This means that to

assess the quality of public expenditure in education (and even private one), a review of the

composition of government education expenditure should be undertaking taking into account

these three dimensions simultaneously. It is also important to take into account that these may

differ, at government level across different education levels and even within them.

Once objectives are defined and known, the assessment of efficiency, equity and adequacy

should be the centre of the analysis which essentially refers to the relationships between inputs

used to produce public goods and services and outputs within education. Such analyses entails

complex measurement issues, as figures on the level and composition of expenditures are not

informative of their efficiency, adequacy or equity (i.e. it is well proven that large spending on

education does not lead to a high educational attainment) and have to be complemented by

output indicators.

With respect to inputs, indicators on levels and trends of education expenditures, as the

COFOG/UOE data discussed in the previous section, need ideally to be complemented by

further indicators to assess the way policies are designed and implemented within different

levels of education. This includes, for instance, indicators such as the number of teachers per

one thousand inhabitants, or the number of pupils per class or per teacher. The economics of

education literature has also proposed a number of output indicators which include, for

example, educational attainment, average number of years of schooling per individual,

indicators of students’ skills in different fields (literacy, numerical, etc.). Nonetheless, the

identification of appropriate output indicators can be controversial and remains to some extent

arbitrary, while also posing statistical problems, as indicators such as those mentioned above

are often available for a reduced number of countries, are not regularly calculated and updated

35

which prevents their use for tracking progress over time and come from different sources

raising problems of comparability with other indicators.

Away from the input-output analysis, this section moves a step forward in the analysis of inputs

and presents alternative performance indicators for public education spending which result

from the disaggregation of education expenditure and which may be suitable of monitoring

across country and through time. This approach should provide important insights on the topic

of quantity and, hopefully, quality of public education expenditure. However, given the

limitations for cross-country comparisons, it is out of the scope of this report to further discuss

on equity, adequacy and more importantly efficiency issues from an academic point of view.

4.2. Disaggregating education spending: An approach to further monitor investment in

human resources, infrastructure and other education ratios.

Research on the economic determinants of school spending has long been addressed in

the empirical literature. The standard framework for analysing education expenditure is the

expenditure demand model of education. In it, it is assumed that the government (either local,

regional or national) is guided by voters’ preferences in such a way that with these preferences

and budget constraints, demand equations are estimated based on school spending, private

income level, tax price and grants. Falch and Rattso (1997, 1999) and earlier on Schultz (1988)

proposed an approach for disaggregating the school into three different components of school

expenditure, namely teacher–student ratio, non-wage spending per student, and student

enrolment ratio. The variation of each of these components across time and space had already

been addressed in the literature on schooling, but their innovation was to link them up to a

decision making system. This disaggregating approach should throw new light on the role of

cost factors in explaining the expansion of educational services and therefore it would be

strongly linked to the efficiency, adequacy and equity of public education funding (without

having to look to education expenditure outputs). School spending decisions are complex, and

involve the number, size and location of schools and the composition of study curriculums. The

approach proposed here is able to identify the aggregate effect of these decisions for the

employment of teachers, the enrolment of students and non-wage spending.

The disaggregation of school spending is made explicit in the budget constraint equation

presented below:

36

" = #1 − &' () *+� + �+�- +�./ ./0 + #1 − ℎ'2 (2)

Exogenous net per capita revenue R is determined by general grants and fixed income tax

revenue sharing. The revenue is allocated to per capita teacher wages, ) *0 (W is the wage

costs per teacher, T is teacher manyears and N is the population size), nonwage school

spending per capita, �0, and per capita spending to other services such as, for example, hospital

services, H. The standard volume measure of resource use, teacher manyears per capita, *0, is

disaggregated to identify three of the elements involved: teacher–student ratio, enrollment

ratio, and youth share of the population,

*0 = *+� +�./ ./0 (3)

Yo is the number of youth in the relevant age group. Matching grants are built into the budget

constraint (m and h are matching grant rates for schools and hospital services, respectively).

Thus, the preferences are represented by a conventional utility function including teacher–

student ratio, *+� , nonwage expenditures per student,

�+�, the share of the young individuals

offered school education, +�./, and per capita hospital services H. The preferences for the services

produced by the county governments are conditioned on sociodemographic descriptives of the

region under study (Z). The political structure (POL) determines what preferences are decisive.

As shown by Falch and Rattso (1999) politicians seem to be interested in aspects other than

school quality when they set their priorities, such as the location of schools, the composition of

the study curriculums or even the capacity of the school system The general form of the utility

function should be:

3 = 3 (*+� , �+� , +�./ , 2; �67, 8- (4)

Given the budget constrain the government in charge maximizes above equation. Thus, more

revenue available for the region/country which control for education spending allows for more

teachers, more non-wage spending and more students: they are all assumed being “normal

goods”. However, since the budget constraint is nonlinear, revenue elasticities can also be

negative. If the share of youth in the population, ./0 , goes up, it will be more expensive to fund a

37

constant student enrolment ratio. The cost effect leads to a substitution away from the school

demand variables. Teacher wages have a similar cost effect. More expensive teaching will

induce substitution both from high schools to hospitals and from teachers to non-wage

spending. The sign of the effect on non-wage spending depends on the size of the income and

substitution effects.

One concern that arises is that depending on the level of studies (i.e. primary education, high

school or tertiary) the institutional setup differs within and among most countries. Thus,

equalization is a national goal in most countries for primary and secondary levels of education,

it is important to be aware that the decentralization of educational policies makes that the

freedom given at county, region or autonomy levels provokes differences in economic

priorities, implying important differences in the teaching offered. The variation across counties,

regions or autonomies is a source of political discussion which is out of the scope of this

research but it is central to the discussion on education expenditure across EU countries. Each

region decision making must handle the choice between quality and quantity among the

different levels of school education and the priority of education against other public services.

While preventing a systematic analysis of overall education spending, the present approach

could certainly be a way forward to monitor spending at the different educational and regional

levels considered.

As an example, Table 11 presents the decomposition of secondary educational level spending

(ISCED 2-3) in all EU countries. The descriptive analyses covers the longer term period from

2002 to 2010 to search for more stable trends, and the financial/economic crisis period (2008-

2010) to look for short term effects. Results report changes in the two periods considered for

the different variables. Thus, we can see how Germany has decreased its youth population

share since 2002, however it has increased its expenditure per student by 11% since 2002. Even

during the economic crises school spending per student in secondary level increased by 6%.

Significant increases have also taken place in non-wage spending per student (41%). On the

other hand, Portugal has also decreased its youth population share at a much lesser pace,

however, it has also decrease its expenditure per student by 11% since 2002 with a big

decrease by almost 30% since the crisis hit in 2008. This is likely to affect the quality of the

education system since it has affected not only the teacher-student ratio, but also the capital

intensity ratio (-45.77% for the long run and -87.06% for the crisis period). These are two

examples of how simple descriptive statistics can help monitor education spending and

motivate further and more robust research on the matter. National expert should better

interpret these results taking into account the role of interest groups and the political structure

38

Table 11. Decomposition of high school spending Changes 2002-2010 Countries Change in school

spending share of total

GDP

Change in youth

share population

Change in school

spending per student

Change in teacher-

student ratio

Change in non-wage

spending per student

2002-10 2008-10 2002-10

2008-

10 2002-10 2008-10 2002-10

2008-

10 2002-10 2008-10

Austria 0.1 0.2 -0.6 -0.3 18.79 8.35 4.66 6.09 10.64 6.55

Belgium

-0.5 -0.1 11.30 2.69

Bulgaria 0.2 -0.1 -2 -0.3 97.88 -1.62 -1.74 -4.45 116.05 -17.98

Cyprus 0.5 0.2 -1.5 -0.4 51.80 11.89 22.69 4.76 269.34 -20.03

Czech Republic -0.1 0.2 -1.9 -0.5 47.42 11.27 -2.95 3.06 40.01 16.58

Denmark 0.3 0.4 0.3 -0.2 -0.48 14.08 11.91 28.93

Estonia -0.8 0 -2.9 -0.3 19.40 0.21

7.43 -0.56 14.82

Finland 0.5 0.3 -0.5 -0.3 18.26 2.40 -4.34 -0.36 22.68 5.84

France -0.2 0.1 -0.5 0.1 1.80 3.93 -9.60 -2.92 29.69 15.12

Germany -0.2 0 -0.9 -0.1 10.91 6.00 10.85 2.57 41.00 25.06

Greece 0.5 0 -0.6 -0.1 66.87 -13.48 -173.38 -157.95

Hungary 1.3 0.6 -1.1 -0.4 336.32 44.43 0.16 0.97 238.96 13.67

Ireland 0.4 0.2 -0.9 0.1 43.16 -0.27 2.74 -11.78 42.75 9.42

Italy -0.1 0 -0.3 -0.1 -7.29 -4.53 -14.86 -8.70 0.08 2.13

Latvia -0.1 -3.3 -0.5

-14.69 15.41 -0.02

-9.03

Lithuania -0.3 0.3 -2.2 -0.4 51.93 6.09 19.99 3.29 25.92 -0.98

Luxembourg -0.2 0 0 -0.2 -13.33 -8.01 21.58 20.43 -22.06 -15.66

Malta 0.1 0 -1.4 -0.4 19.31 2.05 7.35 -7.45 35.78 6.17

Netherlands 0.3 0.2 -0.3 -0.1 17.99 4.85 -3.63 -4.07 20.87 -1.02

Poland -0.3 0 -2 -0.5 54.07 16.90

5.14 107.49 16.52

Portugal 0.2 -0.7 -0.4 0 -11.39 -29.68 -8.96 -0.62 -45.77 -87.06

Romania -0.4 -2.1 0 -26.22 2.24 1.81

-41.67

Slovakia

-2 -0.5 3.38 4.47

Slovenia 0 0.2 -1.3 -0.2 71.89 12.06 29.81 7.91 62.24 6.34

Spain 0.2 0.1 -0.6 0 24.25 -3.14 2.25 -0.01 15.94 -8.77

Sweden 0 0 -1.5 -0.6 24.64 2.81 10.01 -2.99 45.38 6.67

United Kingdom 0.8 0.4 -0.8 -0.2 163.78 9.82 64.36 -14.49 229.60 24.62

(online codes: gov_a_exp, demo_pjanind, edu_ilev, educ_pers1t)

on the school spending decisions. While the level and composition of expenditures is not

informative of their efficiency in translating public resources into desired outcomes,

nonetheless these indicators prove to be somehow useful tools for a proper monitoring.

39

5. Summary and Discussion: A way forward to the monitoring of education

expenditure for quality assurance

One of the original purposes of this paper was to systematically analyse government

spending on education in all EU countries, describing its trends and establishing what factors

determine spending in education as a specific function of general government expenditure.

Although the analysis discussed in this report provides several important understandings on the

topic of quality of education expenditure (mainly public), knowledge is far from complete and

hence further analytical work should be undertaken on both the role of education spending

within a “limited” public budget and its efficiency. Nonetheless, this report provides some

interesting results and opens a number of avenues to monitor education expenditure towards

quality assurance of public finance. They are summarised as follows:

1. It is important to keep in mind that the transfer of competences on educational

policies to regional or local levels that varies from one EU country to another,

together with the significant shortages of the existing data (even less if

disaggregated by educational levels) make the task of systematically monitoring

governments’ public spending a complicated endeavour. Given the complexity of

the issues, monitoring of education expenditure should not be global but centred

around particular topics, such as:

a. Educational levels. In 2010, all EU countries allocated more than two-thirds

of their combined government expenditure to education below the tertiary

level, but the incentives for society to invest in tertiary education benefiting

a smaller group of population are well documented in the literature (see

OECD, 2013). Between 2002 and 2010, spending on the various levels of

education evolved quite differently. For the sake of efficiency, and more

importantly, equity and adequacy, research on education expenditure should

be done separately by educational levels.

40

b. Areas of expenditure. The analysis of public education expenditure by

economic classifications can provide an interesting tool to country experts to

comprehend and appreciate any source of potential inefficiency.

c. Disaggregating the demand function of educational services. The

disaggregation of education expenditure allows for an analysis of how

different decisions at the national or local government level contribute to

education spending (for example, teacher-student ratio vs. capital intensity

expenditure). Monitoring changes in the different components of education

expenditure may help identifying inappropriate deviations allowing a quick

response if necessary. This research must be done by educational levels.

To achieve these objectives various tools should be made more easily available. In

particular, more comprehensive and detailed tables on the economic and

functional breakdown of education expenditures (mainly public) with special

emphasis on their changes over time would be desirable. Here, the most policy-

relevant factor to understand government’s efforts to support education seems to

be the trend in the fraction of general education expenditure as a share of general

government expenditure (GEE/GGE). The pattern shows a general decline since 2002

in the efforts governments made towards publicly financing education. Equally

important, measures that would help enhancing the efficiency of education

expenditure would be those related to the disaggregation of education

expenditure, namely: teacher–student ratio, non-wage spending per student, and

student enrolment ratio. Updated information by educational levels and region of

analysis can contribute a robust analysis on cost factors explaining the expansion of

educational services.

2. When investigating the determinants of education expenditure income and age

structure of the population arise as straight forward covariates. Population age

structure significantly affect public spending in education in potentially two ways: 1)

Countries with a low density of school-age children are less likely to invest in

education; and 2) those countries with a large proportion of elderly in the

population can negatively the decision of politicians to spend on education.

41

Given above statement, it is extremely important to seriously take into account

population trends when assessing current and future levels of education

expenditure.

Having said this, the political structure of the decision making government also

determines what preferences are decisive in terms of education spending. Given this

country or even regional policy context, quantitative research may be

complemented by qualitative information which may not always be integrated into

models.

Overall, despite the fact that this Report does not deal with the importance of collecting

information on educational “outcomes”, the provided evidence points to large potential

efficiency gains in the education sector by simply monitoring education expenditure (i.e.

“inputs”). Thus, it is a first step toward quality assurance of public education expenditure

among EU countries.

42

REFERENCES

Arslanalp, S., F. Bornhorst, S. Gupta and E. Sze (2010), "Public Capital and Growth", IMF

Working Paper 175.

Baum, B.; Seitz, H. (2003). Demographischer Wandel und Bildungsausgaben: Empirische Evidenz

für die westdeutschen Länder. Vierteljahreshefte zur Wirtschaftsforschung 72 (2): 205-219.

Becker, G.S. (1993) Human Capital, 3rd edn. Chicago: The University of Chicago Press.

Bowles, S. (1969) Planning Educational Systems for Economic Growth. Cambridge, MA: Harvard

University Press.

Brauninger, M. and J.P. Vidal (2000) Private versus public financing of education and

endogenous growth. Journal of Population Economics 13: 387-401.

European Commission (2003), “Public finances in EMU – 2003, Part III: Public investment and its

interaction with the EU’s budgetary rules”, European Economy No 3/2003, pp. 99-131

(available online at

http://ec.europa.eu/economy_finance/publications/publication_summary479_en.htm ).

Falch, T. and Rattso J. (1996). Sources of cost expansion: Primary education in Norway 1946-

1990. Education Economics 4(2): 161-185.

Falch T., and Rattsø, J. (1997). Political economic determinants of school spending in federal

states: Theory and time-series evidence. European Journal of Political Economy 13, 299-

314.

Falch T., and Rattsø, J. (1999). Local public choice of school spending: disaggregating the

demand function for educational services. Economics of Education Review 18, 361–373.

Gradstein, M.; Kaganovich, M. (2004). Aging population and education finance. Journal of Public

Economics, 88, 2469-2485.

Hanushek, E.A.; Rifkin, (1997). Understanding the twentieth-century growth in U.S. school

spending. Journal of Human Resources 32(1): 35-68.

Hoyt, W.H.; Toma, E.F. (1993). Lobbying expenditures and government output: the NEA and

public education, Southern Economic Journal, 60, 405-417.

43

Lucas Jr., R.E. (1988) On the Mechanics of Economic Development. Journal of Monetary

Economics 22: 2- 42.

Lucas Jr., R.E. (1993) Making a Miracle. Econometrica. 61: 251-273.

OECD (2013), Education at a Glance 2013: OECD Indicators, OECD Publishing.

http://dx.doi.org/10.1787/eag-2013-en

Poterba, J.M. (1996). Demographic structure and the political economy of public education.

Working Paper 5677, Cambridge: National Bureau of Economic Research.

Poterba, J.M. (1997). Demographic structure and the political economy of public education,

Journal of Policy Analysis and Management, 16(1), 48-66.

Poterba, J.M. (1998). Demographic change, intergenerational linkages, and public education.

The American Economic Review, 88 (2), 315-320.

Reis, F. and S.F.Gheorghiu (2011), “Population and social conditions”, Eurostat Statistics in

Focus 50/2011.

Schultz, T. P. (1988). Expansion of public school expenditures and enrollments: intercountry

evidence on the effects of income, prices and population growth. Economics of Education

Review, 7, 167–183.

South, S.J. (1991). Age structure and public expenditures on children, Social Science Quarterly,

72(4), 661-675.

Sutherland, D. Price, R., Jourmard, I. and C. Nicq (2007). Performance Indicators for Public

Spending Efficiency in Primary and Secondary Education. OECD Economic Department

Working Papers No. 546.

Weingast, B., Shepsle, K., & Johnsen, C. (1981). The political economy of benefits and costs: a

neoclassical approach to distributive politics. Journal of Political Economy, 89, 642–664.

44

Annex I

UOE data collection and COFOG –consistency issues

The data collection covering formal education is administered jointly by the UNESCO Institute

for Statistics (UIS), the OECD, and the Statistical Office of the European Union (EUROSTAT). It is

referred to as the “UOE” data collection. These UOE data collections, and the Eurostat data

collection on regional enrolments and foreign language learning, are currently carried out

through a gentlemen’s agreement.14 The methodological requirements are set up in

cooperation with the participating countries, Eurostat and the two organizations.

The definitions and methodological requirements of the UOE are available on CIRCA at:

http://forum.europa.eu.int/Members/irc/dsis/edtcs/library?l=/public/unesco_collection/2010

&vm=detailed&sb=Title

Eurostat’s Guide to Educational Expenditure Statistics is available here:

http://epp.eurostat.ec.europa.eu/cache/ITY_OFFPUB/KS-BF-05-002/EN/KS-BF-05-002-EN.PDF

There are strong links between UOE data collection and the COFOG data used by the System of

national Accounts (SNA), as expenditure from COFOG (at the 2nd digit level) and in the UOE

data collection are compiled according to the ISCED classification. Some concepts and

definitions are common to the UOE and COFOG analysis. Additionally, UOE Finance tables are

currently being revised in order to make them more compatible with national accounts

concepts. Major differences at the current stage can be detailed as follows:

• Both classifications are based on ISCED 97. However, COFOG covers under function

Education in category ‘Education not definable by level (at the COFOG II level

breakdown: 09.5) non-formal education, whereas UOE is interested only in formal

education (educational programs designated as "adult education" or "continuing

14 A Commission regulation implementing Regulation (EC) No 452/2008 of the European Parliament and of the

Council concerning the production and development of statistics on education and lifelong learning as regards

statistics on Education and Training Systems covering part of the UOE and Eurostat data collections is in

preparation. It should enter into force from 2012 onwards.

45

education" which are not similar to regular education programs, e.g. literacy programs

for adults, are excluded).

• Scope of general government sector: in UOE government dependent educational

institutions (e.g. universities) are not part of the government. They are treated

separately and the part of their expenditure that is financed by private sources is not

taken into account when calculating public expenditure on education. In national

accounts these units can be classified within or outside the general government sector.

Whenever they are classified outside general government sector no differences

between COFOG and UOE in this respect should be observed. However, if these units

are part of general government in national accounts their expenditure on education

financed from "private" sources (private donations, own resources) will also be included

in COFOG government expenditure on education.

• Private expenditure: Both statistics rely on actual outlays, rather than budgets;

however UOE also includes under public expenditure loans for students that are treated

as financial transactions in national accounts and thus not taken into account for

COFOG data. Financial aid to students is delivered in two forms: as transfers and social

benefits to students and their families (grants and scholarships), and as loans given

directly to students. Among the EU countries, there are different combinations of

transfers, social benefits and loans. Half of the EU countries are wholly reliant on

transfers and social benefits, while the other half also makes use of student loans. Of

those that uses loans, some countries relied heavily on this form of support in 2008 (in

the UK, they represented 69% of the financial aid to students) while in others the loans

accounted for less than 1% (Belgium, Italy and Lithuania).

• Time of recording: Accrual (government exp.) vs. Cash accounting (UOE data

collection), however in practice for some countries UOE data can be also on accrual or

mixed accrual/cash basis.

• Data sources and compilation: In some Member States different data sources are used

for compilation of UOE and COFOG data. Even when the same data sources are used

they are treated independently, with independent compilation methods applied. Also,

46

COFOG data are sometimes changed due to reconciliation processes between different

accounts.

• Further breakdown of education expenditure: Detailed breakdown of COFOG function

Education does not fully correspond to UOE breakdown, in particular for grouping of

subsidiary services on education and R&D (allocated in UOE dataset directly to the

corresponding ISCED heading but presented as separate groups in COFOG).

• Treatment of R&D expenditure: UOE includes in education expenditure any research

conducted in tertiary educational institutions. On the other hand, COFOG classifies R&D

expenditure conducted in tertiary educational institutions to the respective functions

(e.g. 01.4 Basic Research, 07.5 R&D Health), and in function Education only R&D on

education.

• Definition of government expenditure: Government final consumption expenditure

corresponds in the UOE to government direct expenditure on educational institutions.

UOE educational expenditure classified as "transfers or other payments from

governments to households and other private entities" is part of social benefits,

subsidies or other miscellaneous transfers in NA.

47

Annex II

Additional Tables and Figures

Table 1A. General government expenditure by function (% of the total expenditure in the year

of reference) - 2002-2010

48

Table 1A. General government expenditure by function (continue)

49

Table 2A. Government expenditure by level of education. 2010.

UOE data COFOG

All PRI SEC* TER* All PPRIM SEC*

POST-

SECT TER* ENCL SUBS R&D

ED

n.e.c.

EU-27 5.43 1.24 2.39 1.26 5.5 : : : : : : : :

Belgium 6.57 1.54 2.79 1.46 6.1 : : : : : : : :

Bulgaria 4.1 0.8 1.76 0.61 3.8 0.8 1.9 : 0.9 0 0.1 0 0.1

Czech

Republic 4.24 0.69 1.97 0.96 4.8 0.5 2.7 0 1 0.1 0.3 0 0.1

Denmark 8.8 2.08 3.04 2.41 8 4 1.8 0 1.4 0.6 0.1 0 0.1

Germany 5.06 0.69 2.46 1.38 4.3 1.1 1.7 0.1 0.9 0.1 0.3 0 0

Estonia 5.68 1.4 2.58 1.23 6.8 2.4 1.9 0.3 1.6 0 0.2 0.1 0.4

Ireland 6.47 2.29 2.64 1.44 5.5 2.1 1.9 0.1 1.1 0.1 0.2 0 0.1

Greece : : : : 4 1.3 1.5 0 0.9 0 0 0 0.4

Spain 4.97 1.27 1.84 1.16 4.9 1.8 1.7 0 1 0.1 0.1 0 0.2

France 5.86 1.2 2.66 1.33 6.1 1.7 2.4 0 0.8 0.4 0.6 0 0.1

Italy 4.5 1.12 2.08 0.84 4.5 1.6 2 0.1 0.4 0.1 0.3 0 0.1

Cyprus 7.92 2.26 3.14 2.12 7.5 2.3 2.5 0 1.5 0.6 0.4 0 0.2

Latvia 5.01 1.43 1.94 0.8 6.1 2.1 1.9 0 0.9 0.5 0 0 0.6

Lithuania 5.38 0.9 2.52 1.27 6.1 1 2.8 0.1 1.2 0.4 0.1 0.1 0.4

Luxembourg : 1.7 1.68 : 5.2 2 1.8 0.1 0.3 0.3 0.4 0.1 0.2

Hungary 4.88 0.87 2.06 0.98 5.6 1.8 1.8 0 0.9 0.2 0.6 0 0.2

Malta 6.74 1.46 3.25 1.54 5.7 1.3 2.4 0.1 1 0 0.1 0.2 0.6

Netherlands 5.96 1.45 2.43 1.67 5.8 2 2.3 0 1.2 0.1 0.2 0 0.1

Austria 5.89 1.01 2.64 1.63 5.7 1.5 2.6 0 0.8 0.3 0.2 0 0.3

Poland 5.17 1.6 1.87 1.18 5.6 1.9 1.6 0 1.5 0.3 0.3 0 0.1

Portugal 5.62 1.52 2.48 1.13 7.1 2 2.9 0 1.1 0.3 0.3 0.1 0.4

Romania 3.53 0.58 1.28 1 3.3 0.9 1.1 0 0.9 0.1 0.1 0 0.2

Slovenia 5.66 1.62 2.1 1.36 6.6 2.3 2.5 0 1.2 0.2 0.2 0 0.2

Slovakia 4.22 0.87 1.98 0.83 4.5 : : : : : : : :

Finland 6.84 1.36 2.91 2.18 6.6 1.3 3 0 1.9 0.2 0 0 0.2

Sweden 6.98 1.7 2.55 2.03 6.9 3.9 1.3 0 1.3 0.2 0 0 0.1

United

Kingdom 6.22 1.87 3.01 1.02 6.9 2.1 2.2 0.8 0.8 0.5 0.1 0 0.5

Iceland 7.6 2.46 2.37 1.63 8.3 3.5 2.4 0 2 0.1 0.2 0 0.1

Norway 6.87 1.83 2.43 2.04 5.9 2.5 1.2 0 1.5 0.4 0.2 0 0.1

Switzerland 5.22 1.46 2.16 1.32 6.1 : : : : : : : :

Croatia 4.27 1.87 0.97 0.78 : : : : : : : : :

Turkey : 1.71 0.82 : : : : : : : : : :

United

States 5.49 1.78 1.94 1.41 : : : : : : : : :

Japan 3.85 1.31 1.47 0.75 : : : : : : : : :

*Revise Table 1 to better understand the concepts included under each level of education.

Note: PRI: Primary education; SEC: Secondary education; TER: Tertiary education; PPRIM: Pre-primary and primary education;

POST-SECT: Post-secondary non tertiary education; ENCL: Education not classified by level; SUBS: Subsidiary services to

education; and R&D: R&D Education.

Source: COFOG and Finance of Education data from Eurostat.

European Commission

EUR 26223 EN – Joint Research Centre – Institute for the Protection and Security of the Citizen

Title: Public financing of education in EU countries: A cross-country systematic analysis

Author(s): Esperanza Vera-Toscano

Luxembourg: Publications Office of the European Union

2013 –52 pp. – 21.0 x 29.7 cm

EUR – Scientific and Technical Research series – ISSN 1831-9424

ISBN 978-92-79-33745-1

doi:10.2788/33594

Abstract

This policy reports aims at: 1) reviewing the composition and trends in education expenditure (both private and public) in the EU with special attention paid to the impact of the current economic and financial crisis; 2) briefly reporting on the impact of the country’s demographic structure on government education spending; 3) approaching the issue of quality of education expenditure in the context of efficiency, adequacy and equity presenting a methodology for the disaggregation of government education spending; and 4) presenting a possible way forward to contribute enhancing the efficiency of education expenditure.

As the Commission’s in-house science service, the Joint Research Centre’s mission is to provide EU policies with independent, evidence-based scientific and technical support throughout the whole policy cycle. Working in close cooperation with policy Directorates-General, the JRC addresses key societal challenges while stimulating innovation through developing new standards, methods and tools, and sharing and transferring its know-how to the Member States and international community. Key policy areas include: environment and climate change; energy and transport; agriculture and food security; health and consumer protection; information society and digital agenda; safety and security including nuclear; all supported through a cross-cutting and multi-disciplinary approach.

LB-N

A-2

62

23

-EN

-N