Júlia Varga – Zoltán Hermann

Chapter 3
Financing public education

No fundamental change has taken place in the financing of public education, however, expenditure on education and changes in the structure of spending were influenced to a large extent by public employees' wage rise, new development sources becoming available in public education, and by government measures affecting secondary vocational training.

3.1. Expenditure on public education

3.1.1. Public education expenditure relative to GDP

The expenditure on public education relative to GDP increased in the period 2000-2004: the share of spending on pre-school institutions increased from 0.7% to 0.8%, and expenditures on primary and secondary education institutions grew from 2.71% to 3.13%. The total amount of public education spending on state-maintained institutions and state funding of non-state maintained (local government) institutions increased from 3.64% to 4. 27% of GDP in the period 2000–2004.

Per-student spending at pre-school institutions relative to GDP per capita is above the average of OECD countries. Per student spending on primary education approached and reached the average of OECD countries by 2001 and 2002, respectively, while expenditures on lower and upper secondary education fell short of the OECD average.

Table 3.1. Per-student spending relative to GDP per capita, according by levels of education in the OECD countries and in Hungary, 2000–2002 (%)

Year	Pre-school education (ISCED 0)		Primary education (ISCED 1)		Lower secondary education (ISCED 2)		Upper secondary education (ISCED 3)
	OECD	Hungary	OECD	Hungary	OECD	Hungary	OECD	Hungary
2000	17	21	19	18	23	17	26	23
2001	17	22	20	20	23	18	28	23
2002	18	24	20	21	23	20	28	25

Source: Education at a Glance, 2003; 2004; 2005

3.1.2. Changes in spending

Between 2001 and 2003, for the first time since 1990, public education spending of state (local government) institutions significantly increased not only in current terms, but also in real terms. In real terms, public education spending grew by 5% in 2001, by 6% in 2002, and by 17% in 2003. This significant increase was primarily attributable to the increase in public employees' wages. However, the growth in public education spending stopped between 2003 and 2004. Between 2001 and 2004, budget support for non-state institutions grew at a larger pace than expenditures at state institutions (by 35% at current prices and by 51% in real terms), and the proportion of that support relative to public education spending also increased from 7% to 9%.

After 2001, the share of capital expenditures (including renewal and capital investment) within total expenditures began to fall. The average drop of 2% in investment rates may be related to the fact that school maintainers' current expenditures on education increased as a result of public employees' wage rise. Within current expenditures, the proportion of personnel costs (compensation of staff), i.e. the proportion of wages, increased. In public education in total, the proportion of wages accounted for 53% in 2001, 59% in 2003, and 58% in 2004. With contributions added, the ratio was up from 79% to 83%, and the proportion of material expenses, in turn, fell from 21% to 17%.

3.1.3. Spending per student

In 2002, Hungary spent 70% of the OECD average (USD 3475 as opposed to USD 4922) per pre-school student at comparable prices (in USD at purchasing power parity). Hungary's spending per primary education student accounted for 57% (USD 3016 as opposed to USD 5273), spending per lower secondary education student accounted for 46% (USD 2836 as opposed to USD 6089), and expenditures per upper education student accounted for 50% (USD 3573 as opposed to USD 7121) of the OECD average. In international comparison, Hungary spends relatively much on pre-school education relative to its own level of development and to the number of pre-school pupils. The level of educational spending per primary education pupil is largely in line with that in countries at a similar level of development. However, Hungary spends less per lower and upper secondary education student compared with countries at a similar level of development. The actual gap is likely to be smaller, as data do not include spending of non-state maintained educational institutions, when the proportion of secondary school students studying was 35% in 2004/2005.

3.2. The financing of public education

Three large resources of public finances are related to the financing of public education: the central budget, local government subsidies and the training fund of the Labour Market Fund (Munkaerő-piaci Alap, MPA).

Table 3.2. Financing System of Public Education

Since 2004, parts of European Union structural funds too have been used to fund public education development purposes.

Most grants are provided to school maintainers by the central budget on a normative per-capita basis. Normative per-capita basic and additional contributions are not earmarked grants: local governments may freely reallocate them from educational to other purposes. The central budget provides support to school maintainers also in the form of so-called targeted normative per-capita grants and centralised budgets. Local governments must use these resources for educational purposes. Maintainers of local government institutions and non-state institutions receive the same amount of normative per-capita basic-contributions. Non-local government school maintainers too receive additional normative per-capita grants and dedicated subsides, but the scope of these subsidies is not entirely identical to grants given to maintainers of local government schools. Between 2000 and 2004, subsidies from the central budget granted to local government institutions increased by 67% at current prices, while central budget subsidies granted to non-local government institutions more then doubled.

Table 3.2. The growth rate of total normative per-grants and central budget subsidies given to local govern­­ments and non-local government school maintainers, at current and real prices, 2001–2004 (%) (2000=100%)

Year	Current price		Real price
	Local government maintainers	Non-local government maintainers	Local government maintainers	Non-local government maintainers
2001	111.3	127.3	101.9	116.6
2002	126.3	114.8	119.9	109.0
2003	118.7	161.7	113.4	154.4
2004	105.2	107.1	98.5	100.3

Source: Data from financial reports of institutions of local governments and the central budget, and from the acts on the implementation of the central budget, and calculations of Júlia Varga, based on the consumer price index of the Central Statistics Office

Between 2001 and 2004, the share of total current educational support from the central budget within local governments' public education spending stayed relatively steady around 60%. That compares with a share of normative per-capita contribution in local governments' educational spending of 58-60%, with the exception of 2002.

The number of entitlement categories have significantly increased over the past 4 years: local government subsidies for public education purposes included 42 entitlement categories in 2001, while in 2004 the number reached 63. The number of basic normative per-capita grants also increased, normative per-capita grants for general schools have again become differentiated according to academic year, while normative per-capita grants in vocational practical training are now differentiated according to both academic year and location of training. An increase in the number of entitlement categories was also witnessed in the case of additional normative per-capita grants and targeted normative grants. The proportion of contributions and additional per-capita grants not directly related to educational activities, but rather linked to the background of the settlement and children's and students' social situation, ones promoting partnership and recognising transition between settlements has become relatively significant in recent years. Their volume within total grants exceeds 10%. The proportion of sectoral targeted support and dedicated normative per-capita grants has decreased, although these are specifically the financing elements that public administration can directly control, and accordingly, they form an important instrument in government education policy. A likely reason for the decrease is that after 2004 these resources were used, in part, to fund the local financing component of the National Development Plan.

3.2.1. Training fund of the Labour Market Fund, vocational training grants

Development resources in vocational training have seen an increase in the last four years. Between 2001 and 2005, payments made by business associations to the development and training fund of the Labour Market Fund increased by 75% (see insert). The largest proportion of the vocational training fund is used to provide local funding for the education objectives of the Human Resources Development Operational Programme (HRDOP), but part of it is also used to finance other tenders.

3.2.3. Public education in the local government budget

Educational expenditures of the central budget and, within that, normative per-capita educational grants constitute important but indirect components of the expenditures of local government schools. Finally the expenditure of each school are is determined by the budgetary situation of school maintainer local governments, and that, in turn, in addition to educational normative per-capita grants is influenced by the combined effect of other central government grants, opportunities for local revenue and local expenditures needs. After 2002, the most significant change affecting the composition of local government revenues was that as the share in the proportion of central government grants increased, the share of local governments' own revenues decreased. The most obvious change on the expenditure side is the significant expansion in the share of operating expenses that occurred after 2002. Teachers' pay rise in 2002 increased the share of educational current expenditures by about 3-4 percentage points. After 2002, the proportion of capital expenditures fell to three-quarters of prior levels.

3.3. The efficiency of public education

The efficiency of education can be assessed from two aspects. In the case of internal efficiency, targets set by the educational system, typically measured as students' learning performance, are compared to expenditures. External efficiency is assessed on the basis of expenditures and students' subsequent labour market position (the chance of employment, wages). Here the efficiency of education is discussed in a macro perspective.

3.3.1. Internal efficiency of education

Employment of teachers

One of the most serious problems of the Hungarian public education concerning internal efficiency is related to the situation that has evolved in the field of employment of teachers. Public education financing – based on normative per-capita government grants– is assumed to provide a strong incentive to school maintainer local governments to improve efficiency and to avoid over-employment of teachers. However, that impact seems to have been offset in the last fifteen years by other elements of education policy.

Decreasing child numbers were not followed by a proportionate decrease in the number of teachers. (See also Chapter 4.) The shrinking student population resulted in a decreasing student-teacher ratio is a result of falling student numbers at both local and national levels. However the drop in the student-teacher ratio occurred in a surprisingly uniform manner across settlements with different demographic situations, which implies that the central education policy has a decisive role in this process. Changes in various regulatory elements (from teachers' teaching hours and the corresponding allowances to the individual elements of curriculum regulation) had an overall effect of maintaining the existing level of teacher employment and increasing the labour force intensity in education. Another indirect sign of the role of the central education policy is that average class sizes did not significantly change in general schools; the student-teacher ratio is almost completely driven by changes in the number of teachers per class. Contrary to the student-teacher ratio, average class sizes in Hungary fall short of OECD averages only by a small extent. Hungary's lower student-teacher ratio, therefore, is mostly due to a higher number of teachers per class, which is also related to teachers having to teach fewer hours. However, the international comparison of the student-teacher ratio may be biased by the widespread day-care services in schools in Hungary, since the staff of that is also included in the number of teachers.

On the whole due to poor adaptation to demographic changes, in international comparison, Hungary's public education system has accumulated an excess in teacher employment which does not entail an improvement in the effectiveness of education; students' test results are not above the international average. In other words the education system is currently unable to adequately use the relatively high number of available teachers to improve the effectiveness of education. (See also Chapter 8.)

Table 3.3. Unit cost indicators in Hungary and corresponding averages of OECD countries, in primary education, lower and upper secondary education, 2003

	Primary education		Lower secondary education		Upper secondary education
	Hungary	Average of OECD countries	Hungary	Average of OECD countries	Hungary	Average of OECD countries
Student-teacher ratio	10.6	16.5	10.6	14.3	13.2	13.0
Number of students in class	20.4	21.6	21.6	23.9	–	–
Teacher-class ratio	1.93	1.31	2.03	1.67	–	–
Student instruction time * (hour)	707.6	817.2	825.5	879.3	1206	945
Teacher teaching hours (year)	777	795	555	701	555	661
Teacher salary (15 years of service USD PPP)	14,923	33,336	14,923	35,876	18,463	38,317
Teacher salary relative to GDP per capita (15 years of service)	0.984	1.244	0.984	1.338	1.217	1.429
Teacher salary per lesson (15 years of service. USD PPP)	19	41	27	51	33	59
Teacher salary per lesson relative to GDP per capita (15 years of service)	0.00127	0.00153	0.00177	0.00192	0.00219	0.00218

Source: Education at a Glance, 2005

Schools in small villages

Another frequently discussed topic in debates about the efficiency of public education is the assumed inefficiency of small village school. Some argue that because unit costs in schools in small villages significantly exceed the expenditures of larger schools, and because their effectiveness falls short of that of other schools, maintaining these institutions incurs substantial efficiency problem. However, empirical estimates suggest that by merging/closing schools in small villages, the efficiency of education could be improved by a rather small extent at macro level, even in the case when the potential additional benefits that schools may provide to the inhabitants of small villages are ignored. On the one hand the proportion of students studying in the smallest schools which are expensive to run in unit cost terms is so low that merging/closing such schools would produce a maximum of 1-2% of savings at macro level, and also, the savings thus achieved would be reduced by students' travel costs. On the other hand a large part of the differences in the effectiveness of schools is explained by the student composition with respect to parents' educational attainment. Looking at progression to secondary education, for instance, a smaller proportion of students studying in small schools with less than 150 children goes to general secondary schools than students of larger schools in villages or in cities. If, however, we eliminate the impact of the family background, we find no significant difference relative to larger village schools, and the difference between village and city schools drops to a very small level.

3.3.2. The external efficiency of education

The major problem in the external efficiency of education in Hungary is that the employment chances of people with low educational attainment are very poor due to their lack of appropriate level general skills. In 2003, the employment rate of men aged 25–64 with a highest educational attainment of a general school certificate was 47%, and the rate was 35% for women, which is the second lowest among OECD countries. In 2003, at the secondary level the wage premium of one additional year of schooling – after controlling for other factors – was 7% on average, which is close to the OECD mean. However, while the wages of skilled-workers and graduates of vocational schools exceeded the wages of those with a general school certificate by 13-14%, employees with a secondary school leaving certificate have realised 27-32% return compared to the unskilled.

3.4. Inequalities and school financing

While it is true that there is not necessarily a strong correlation between expenditures and quality of education, higher spending may provide the opportunity for quality improvement. Thus inequalities in school expenditures is of a major concern regarding equity in education. Differences in educational expenditures stem from local governments' budgetary conditions, and, as a factor in that, from inequalities in local tax base. Empirical analyses demonstrate that settlements' financial standing have a considerable impact on the volume of educational spending. The higher average income the inhabitants of the settlement have, the more favourable the local government's budgetary situation is, and, in turn, the more it can spend on operating local schools. Students have access to different educational services depending on whether they live in a poorer or wealthier municipality. That is supported by the correlation between educational operating expenditures in unit terms and average income of inhabitants. This is particularly strong in the case of towns, while for villages income has only a modest impact on school expenditures. The extent of disparities in expenditure attributable to income differences increased in the mid-nineties, to be followed by a drop. The decrease is partly the result of an increasing share of general (i.e. not service-specific) equalising grants within the total amount of central government subsidies.

Chart 3.1. Local governments' educational current expenditures in unit terms, according to income quartiles of cities, relative to the national average, 1993–2003 (%)

Source: Calculations of Zoltán Hermann, based on the local government database of the GyMS county regional directorate of the Hungarian State Treasury and on the database of CSO T-STAR.
Note: educational spending: full-time primary and secondary education, excluding special educational provision for disabled students and primary art education. Unweighted averages. According to settlements' legal standing (cities, towns or villages) in 2002.

3.4.1. Support for the education of disadvantaged students

A necessary – although by far not sufficient – condition for more efficient education of disadvantaged students is for the education system to allocate above-average resources to the training of such students. Compensating for disadvantages attributable to the family background requires, amongst others, teachers' increased personal attention, and, in turn, more working time from teachers, and the application of modern pedagogical methods. All of these increase the unit costs of education. However, empirical analyses based on data from 2002 show that this consideration is not reflected in school financing in a tangible way: spending of schools teaching a higher proportion of disadvantaged students do not exceed the average level. On the whole it appears that in school financing, the education system does not spend more on the education of students whose effective education would require increased expenditures. After 2002, improving the education of disadvantaged students and, in particular, eliminating segregated education became a priority objective in the education policy. The Ministry of Education launched a number of programmes to achieve that objective, and allocated grants to programmes that can be accessed subject to meeting certain conditions. In the case of normative per-capita grants, however, local governments are not required to spend the additional grants necessarily on those schools that teach students who make the local government eligible to receive such grants. The first empirical analysis suggests that the effectiveness of this policy in the short run is at least doubtful, since the impact of the additional grant is undetectable in the overall school budget.