Chapter 3
Financing Public Education

It is generally true and particularly relevant for the evaluation of the 1998–2002 period that public education expenditure and the absolute and relative position of this sector are not to be analysed independently of the condition of national economy. After all, in this period following a recession and a stagnation lasting longer than a decade, the economy started to dynamically grow.

Until the end of 2002 – when the salary of teachers was considerably raised in one single increase – educational expenditure relative to GDP remained relatively low. After the change of government, the shift in educational policy priorities modified the range of professionally and politically preferred tasks. In the reviewed period, more differentiated ways of support, new supplementary state support and earmarked subsidies were introduced. Although the role of the state did gain importance, the system of responsibilities shared between the state and the school maintainers remained basically unchanged.

3.1. Expenditure on public education

3.1.1. Total education expenditure in relation to GDP

The national economy produced a rapid growth between 1998 and 2001, by an annual average of 3.7–5.2% of the GDP. Total education expenditure (including all levels of education and public and private sources) was 5.5–5.6% of the GDP between 1999 and 2001. 5.1–5.2% of the state budget (public expenditure) relative to the GDP was devoted to education.¹

Figure 3.1.
Public expenditure on education and public education as a percentage of the GDP, 1990–2001

Source: Educational Yearbook 2001/2002, OM, 2002

The relative position of the public education system was seemingly the best in the early 1990s. In this period, however, there was a major decrease in the gross domestic product. The percentage of the GDP spent on education was high, due to the decrease in the performance of the economy. For the first time since 1998, the economy produced a high growth rate. In spite of this, the education system, similar to other large public service systems, was not able to immediately benefit from this increase, since this would have limited the impact of the driving forces of economic growth. The budgetary position of the education system had improved in absolute terms, while its relative position (the ratio of public expenditure compared to the GDP) became weaker.

3.1.2. Public expenditure on education

There was a shift in public expenditure on the various school levels. The proportion spent on pre-school education continuously decreased due to the reduced number of children in this age group caused by demographic reasons. The combined data for primary and secondary education show the same tendency. The share of higher education expenditure has been increasing since 1998, in connection to the growing number of students enrolled in higher education. In the past, public expenditure on education was approximately 10-11% of the total state budget. This rate has somewhat increased since the late 1990s.

Figure 3.2.
Growth rate of current expenditure in public education (pre-school, primary, lower and upper secondary education) and consumer price index, 1991–2001 (previous year = 100%)

Source: Educational Yearbook 2001/2002, OM, 2002; Data of Education 2002/2003, KSH, 2003

Table 3.1.
Educational expenditure by level of education in percentage of the GDP, 1998–2001

Description	1998	1999	2000	2001*
Pre-school education	0.75	0.77	0.71	0.71
Primary, lower and upper secondary education combined	2.93	2.91	2.71	2.77
Total expenditure on public education (incl. pre-school education)	3.68	3.68	3.42	3.49
Higher education	0.91	0.97	1.09	1.04
Other education1	0.19	0.20	0.21	0.20
Other expenditure related to education2	0.11	0.33	0.40	0.47
Total educational expenditure	4.89	5.18	5.12	5.20
Public expenditure on education as a percentage of state budget	9.75	11.02	11.13	N/A

Source: Educational Yearbook 2001/2002, OM, 2002
^* Preliminary data
¹ post-graduate courses, other further training courses, etc.
² Professional educational and counselling services are shown in this category

Reviewing the distribution of educational expenditure, there are two permanent trends to be pointed out: (1) after 1997, growth rate of expenditure on goods and services consumed (real costs) fell below the personal expenditures (compensation of all staff), one of the reasons being that central wage provisions resulting in a growth of payments were carried out to the loss of real costs; (2) the rate of capital expenditure stayed low throughout the 1990s – this rate was approximately 5%, all levels of public education included (pre-primary, primary, lower and upper secondary education).

3.1.3. Educational expenditure per student in public education

Comparing the per capita GDP with the educational expenditure per student shows whether the educational system is operating at a ‘high or low price’. While in 2001, the public expenditure on education per student was 15% higher than the year before, and 42% higher than in 1998, public expenditure on education relative to per capita GDP actually dropped. In this period the per capita GDP grew more dynamically than the public expenditure on education per student. The fact that the expenditure per student grew more (by 42%) than the total public expenditure on education (which was 39% between 1998 and 2001) may be a sign of deteriorating cost-effectiveness in public education.

Table 3.2.
Public expenditure per student in primary, lower and upper secondary education in percentage of per capita GDP, 1998–2001

Year	Public expenditure per student	Per capita GDP	Public expenditure per student in percentage of per capita GDP (%)
	(HUF)
1998	204,004	982,552	20.76
1999	231,814	1,112,915	20.83
2000	251,957	1,287,906	19.56
2001	290,000*	1,455,099	19.93

Source: Educational Data (Preliminary Data)], KSH, 2002
^* Estimates, based on calculations by Miklós Balogh.

It is worth pointing out that the expenditure per student in proportion of the per capita GDP is somewhat higher in pre-school education in Hungary (21%) than the average of OECD-countries (18%). In primary education (ISCED 1) there is no difference, however, in lower secondary education (ISCED 2) (Hungary 18%, OECD 23%), as well as in upper secondary education (ISCED 3) (Hungary 24%, OECD 28%) there is a more significant difference between the indicators.

3.1.4. Expenditure in international comparison

As far as the relation of public education expenditure to the gross domestic product is concerned, Hungary is not in a favourable position in international comparison. In 1999, Hungary spent merely 3.1% of its gross domestic product on primary and secondary education with only four OECD-countries producing rates below this level. This rate is over 16% less than in 1995. In this period public education expenditure remained the same or increased in OECD-countries and EU member states.

3.2. The financing system of public education

3.2.1. Main features of the financing system

The principles of financing public education are concurrent to the 1990 Local Government Act and the provisions of the 1993 Public Education Act, including the educational sectoral requirements defined in the 1996 Amendment to the latter.

3.2.2. The operation of the public education financing system

In the late 1990s, the intention to increase the role of the state in financing public education was strengthened. The 1999 Amendment to the Public Education Act – confirming the so-called ‘80% warranty’ defined in the 1996 Amendment – declared that the current annual per student formula support allocated to local governments shall never be less than 90% (on a national average) of the total expenses spent on public education by local governments in the two preceding years, reduced the expenses related to the retention and accumulation of capital, the income of the institutions used for the purpose of operation, and the amount of centralised allowances.

Figure 3.3.
Expenditure on primary, lower and upper secondary education in relation to the GDP in EU countries and in some pre-accession countries*, 1995 and 1999 ( %)

Source: Education at a Glance, 2002
Note: The data do not include pre-school education but do include non-tertiary post-secondary education. Expenditure includes both private and public expenditure.
^* Calculation methods used in various countries may show a slight difference (see the original OECD source).

A sign of the increasing role of the state is the significant growth in the amount of central and earmarked state support compared with previous ones. The state made efforts to influence the way of granting educational provisions through the system of per student formula funding. The increasing role of the state, however, proved to be controversial in practice. The 90% warranty of the annual budget for instance, was only in effect for one year and this provision of the Public Education Act was cancelled when the budgetary law was passed in 2001, containing a two-year budget.

In the 1998–2002 governmental period, the initiative to provide for equal opportunities for residents of smaller settlements had a high priority on the political agenda. This priority was achieved by raising substantially the amount of per student capita grant of schools and dormitories operating in smaller settlements, and by increasing and differentiating additional subsidies that small villages are entitled to get. If the settlement provided education for an ethnic minority, it could receive double the amount of the per student support. Thus the level of budgetary state support approximated the actual expenses. In this period, organizing afternoon study groups was recognized by the state budget as a form of educational provision. For afternoon study groups of the first four grades of primary education, school maintainers received an additional 20% of the per student capita grant.

Part of the per student state support is associated with basic tasks such as pre-primary education, general school education, and secondary education. These amounts are substantially increased every year. However, due to decreasing enrolment numbers, this does not automatically guarantee that the revenues are increasing at the same rate for local governments.

Table 3.3.
Actual amount of the main per student capita grants in public education, 1998–2003 (student/year/HUF)

Year	Pre-school	General school	General secondary school	Vocational secondary school
1998	67,000	72,750	86,000
1999	80,000	83,000	108,000
2000	100,000	104,000	126,000
2001	114,000	118,600	143,700
2002	127,000	132,700	160,300
2003	182,000	190,500	240,000

Source: Annual state budget acts
Note: In years when the actual amount of capita grant depended on grades, the data for the level of education are calculated on the basis of weighted averages. General school per student capita grants for 2003 are the average amounts of per student grants for 1–4th graders and 5–8th graders, respectively.

The various forms of per student state grants totalled 15.3% of the revenues of local governments in 2001. The per student grant of public education is a major part of state subsidies. Increasing per student grant in fact only denotes a new internal division of the proportions between state and school maintainer local governments in funding: as the proportion of support from per student capita grant increased, there was less need of additional funding by local governments. In 2001, total state subsidies covered 58.2% of public education expenditure by local governments, compared to 54.4% in 1998.

In the 2001 central budget, subsidies covered a smaller proportion of expenses than in the previous year, which may be related to the pay rise and various characteristics of the structures of institutions. Due to a permanent decrease in the number of students, the gross increase of salaries in 2001 (20.2%) was not covered by the increase in per student state support. The fact that the per student costs of smaller schools were higher became more obvious than ever.

Educational institutions may have many sources of revenues. In 2001/2002, a survey questioned school heads on the various ways of securing resources and revenues in the previous 3 years (specifying the received amount). The answers most frequently mentioned amounts obtained from county public foundations for public education (58%), school premises rental revenues (44%) and student contributions to meal costs (28%). 19% of the school heads mentioned contributions to the school’s foundation.

Figure 3.4.
State subsidy spent on public education in the total expenditure of local governments, 1991–2001 (%)

Source: Acts reporting on the use of the state budget (Calculations by László Limbacher).

A major shift in the financing of vocational training in this period was the result of the increased amounts of vocational training contribution (1.5% of the payroll) paid by economic organizations, which significantly increased because of the growth of the economy. In 2001, a new Act was passed on vocational training contribution and the development of the system of vocational training. The Act provided for new decision-making bodies with control over the received vocational training contributions, and opened up this resource to higher education institutions.

Table 3.4.
Average amount of school revenues from various sources and the frequency of their supply, 1999–2001 (in HUF thousands)

Source	1999		2000		2001
R: Received amount; F: Frequency (%)	R	F	R	F	R	F
Local public foundation, foundation of the local government	791	19.9	460	22.0	593	23.9
County public foundation for public education and vocational training	1,797	40.8	1,909	56.0	3,196	58.0
Other county or regional fund for development	3,188	10.3	2,717	11.3	4,467	11.1
National institution, public foundation for education	1,937	23.6	1,780	27.7	2,032	30.7
Other national state-run foundation	914	13.0	730	13.7	922	14.6
European Union educational programmes (including Hungarian offices)	1,730	2.5	2,314	3.9	4,664	4.6
Other international projects	16,058	0.6	3,188	1.6	2,047	1.7
Non-governmental sources in Hungary (e.g. the Soros Foundation	1,078	11.8	1,788	8.0	3,071	6.5
Contributions to the school foundation	3,252	16.5	1,604	18.8	1,917	19.1
Rental revenues (real estate, equipment)	1,157	43.0	1,329	45.0	1,402	44.4
Dormitory fees	3,890	2.6	4,176	2.4	4,100	2.4
Tuition fees	1,093	6.4	1,212	6.6	1,117	7.0
Fee-paying courses and optional extracurricular lessons	2,973	10.3	2,748	11.1	30,001	10.8
Market-oriented educational services	5,781	2.0	4,880	2.2	4,585	2.3
Revenues of school-run companies (training workshop, training farm)	12,490	3.9	15,033	3.6	14,822	3.5
Students’ contribution to meal costs	4,436	27.2	4,866	28.4	7,049	28.4
Vocational training contribution (direct payment by companies and entrepreneurs)	10,498	15.8	12,986	16.0	9,959	15.4
Additional revenues of the school (not received through tenders)	4,532	29.2	4,480	30.3	5,514	29.7

Source: School-level data collection 2001/2002, OKI KK
Question asked: “Please indicate which of the tenders below provided revenues for the school in the past 3 years” and “Please indicate which sources below provided revenues for the school in the past three years” Sample size: 831 schools.

3.3. Financing and local processes of public education

3.3.1. Local processes determining financing

The relative proportion of educational expenditure within the expenditure of local governments barely changed in the given period. In 2001, local governments spent around one quarter of their total current expenditure on education, and 1.8 % of their development costs.

The most important question for local governments concerns the additional amounts they must spend on educational institutions in order to preserve their good working conditions and their appropriate functions. Due to the nature of the system of financing, the educational revenues of local governments depend on the number of students as well as on the level of schooling and the distribution of the students among these various levels and institutions. However the determinant factor of the financial relationship between the institution and the local government is the number of school classes, which serves as the basis for the calculations for indicators directly determining institutional expenditure: the number of lessons and the number of teachers.

In the recent years there were various processes influencing revenues and expenses. In pre-schools the number of children was nearly 15% smaller in the school year of 2001/2002 than in 1995/1996; however, the number of classes dropped by a mere 3%. In general schools the number of full-time students dropped by 4.4%, yet the number of classes decreased by 2.5%. In this period the number of full-time students in general secondary schools increased by 11%, whilst the number of classes increased by 17%. In secondary vocational schools the number of full-time students increased by 14.5%, yet the number of classes increased by 22%. These trends had an unfavourable effect on local governments that had to observe severe financial constraints.

3.3.2. Local strategies of funding

Legal provisions regulate the organization of financing public education by local governments, while their opportunities are determined by the correlation of the amount of revenues gained from per student grants and the needs of the institutions.

In the period reviewed, a promising process started concerning the improvement in decision-making and implementation, especially in cities. On the other hand, local governments are incapable of taking on long-term responsibilities, which may partly be explained by the continuous change of legal provisions and the insecure financial position of local governments. Many of the financially troubled local governments continuously struggling with lack of funds do not take on themselves the responsibility of the introduction of local regulations, as they feel unable to make well-founded decisions for more than a year ahead. Base-oriented financing – a financial strategy based on the budget of the previous year – still remains a dominant trend, yet in cities maintaining an extensive network of institutions there is an effort to introduce task-based local financial regulations. The most impressive models of local regulation are based on the control of the number of lessons in school. The number of teachers and the financial framework is calculated on the basis of the number of classes and the number of lessons for each class as well as the legal provisions concerning the salaries of teachers. Large settlements (cities) generally tend to increase the number of students per class. Due to the decreasing number of students, these local governments aim to achieve higher student numbers through a merger of institutions.

3.4. Impact of the 2002 pay rise of public employees

Following the 2002 general elections there was an extraordinary 50% increase in the salary of public employees. This decision put an end to the ongoing debate on the lifetime career model of teachers and the need for a separate wage scale for teachers. For the last quarter of 2002 local governments received the increment of the guaranteed measure of the wage-scale for each public employee and for each task from the central budget. Direct state financing of the additional cost required by the pay rise, however, was only temporary. The pay rise of public employees, on a national average, increased the expenses of local governments by 29-30%. As defined in the 2003 State Budget Act, the state provides for the increased salaries not through direct financing, or by increasing the amount of per student capita grants, but by nationally increasing the revenues of local governments in accordance with the proportion of the increase in expenditure generated by the pay rise.

The increase in educational expenses significantly alters the financial position of public education in the budget of the local governments. The burden of increased expenses is the greatest for smaller settlements (having few additional resources) and county governments (not entitled to levy their own taxes), due to their limited revenues. Non-governmental school maintainers, and those that are unable to significantly rely on parental contributions or other revenues may experience an impairment of their financial standing.

The continuous increase in the relative burden of education due to the growing amount of expenses allows for fewer opportunities for local governments and a decreasing degree of financial independence. The significant increase of expenses is likely to place the issue of the cost-effectiveness of public education in the focus of attention. Auditing of local provisions for obligatory educational tasks and a rationalization of the network of institutions may become necessary, particularly in the case of the local governments of large cities.

3.5. Problems of cost-effectiveness in the public education system

In the recent years a number of experts called attention to the problems of cost-effectiveness in Hungarian public education, however, this issue was never highlighted by educational policies. It is important to emphasise the fact that the issue of cost-effectiveness can by no means be reduced to an issue of budget-related or financial efficiency. Educational policy must deal with the issue of cost-effectiveness in the overall dimensions of quality and efficiency. The low cost-effectiveness of public education is not an exclusively Hungarian phenomenon, it is characteristic of other former socialist block countries as well.

The results of various international comparative analyses also identified the problems of cost-effectiveness in the system of Hungarian public education. In 1999, Hungary spent 73% of the average GDP-related education expenditures of OECD countries on primary and secondary education. In comparison, the salary of teachers employed in public education – in the same year, in proportion of the GDP – was merely 57% of the salaries of teachers in OECD-countries². At the same time, Hungary spends 75% of its public education expenditure on salaries, as opposed to an 80% OECD average. Since in Hungary the same number of students receive their education with the involvement of far more teachers than in other countries, this results in a limited amount of available resources per teacher. While in the late 1990s, in the EU countries, the primary and secondary education of 1,000 students involved 74 full-time teachers, in Hungary the same number of students were taught by 93, thus 26% more teachers.

Figure 3.5.
Number of teachers per 1,000 students in primary and secondary education in the European Union and some pre-accession countries, 1999/2000

Source: Key data..., 2002

The cost-effectiveness of education is significantly impaired by the intentions of educational policymakers aimed at retaining an identical number of teachers employed, despite decreasing enrolment numbers. This intention is revealed in expanding the range of tasks requiring fully qualified teachers, as well as in the engagement of teachers in providing welfare-related tasks. In international comparison, the low number of lessons per teacher combined with the above mentioned newly determined range of teaching tasks preserves the great workforce need of the public education system.

The number of students per class has dropped on all school levels, yet the local governments in smaller settlements are incapable of controlling the number of children in pre-schools or general schools. The local governments of larger cities operating an extensive network of institutions may find ways to achieve this objective, yet their efforts are limited by the operation of 6-, and 8-grade general secondary schools. As a result of this restriction, opportunities for merging classes of 5–8^th graders are limited, and the number of students in school classes remains rather low. An additional factor increasing per-student costs is the widespread system of student welfare services in general schools.

The problems of cost-effectiveness in Hungarian public education system are intertwined with the fragmented network of institutions, determined by the layout of settlements. The performance of tasks defined by the Local Government Act and the Public Education Act result in a network of institutions with a lower level of cost-effectiveness. In settlements where the population is less than 2,000 – constituting the maintainers of over half of all 8-grade general schools in Hungary – cost-effectiveness can hardly be influenced by the decisions of the school maintainer. In such settlements, demographic trends and the provisions of the state budget almost completely determine the level of costs per student.