Memorandum submitted by the Institute
for Fiscal Studies
1. OVERALL TRENDS
IN EDUCATION
EXPENDITURE
Compared to other areas of public expenditure
The real average annual rates at which the six
main areas of public expenditure—including education—have
increased over time are shown in Table 1. Since Labour came to
power in 1997, there have been large real increases in education
spending (4.8% a year); but perhaps surprisingly this has been
only the fourth fastest broad area of spending growth, after spending
on the NHS (6.1% a year), Transport (5.1% a year) and Public order
and Safety (4.9% a year). Education received much smaller average
annual increases during the 18 years of Conservative governments
from 1979-1997 (1.5%).
Education spending, along with the other components
shown in Table 1 (with the notable exception of defence) has grown
much more quickly over Labour's second parliament than over its
first (largely due to slow growth in the first two years of the
first parliament, when the inherited spending plans were adhered
to, but also due to a significant under-spend by government departments
in 1999-2000).
Table 1 also shows the real increases in public
spending implied by the plans set out in the Government's 2004
Spending Review. Under these plans, spending on education would
continue to grow as a share of national income, but less quickly
than the average increases seen since April 1997.
As a proportion of GDP
Since its lowest point for at least 20 years
in 1999-2000 (at 4.4% of GDP), education spending has grown rapidly
as a share of national income, and in 2004-05 stood at 5.4%. This
share is comparable to that last seen in the early 1980s and well
above the average between 1977-78 and 2004-05 of 4.95%. By 2007-08,
the share is projected to reach 5.6%. Training expenditure accounts
for approximately a further 0.2% of GDP (see Figure 1).
International comparisons
The UK spent a higher share of national income
on education than Japan, Italy and Germany, but a lower share
than the USA and France in 2002. (Table 2). This ranking is similar
if we just consider public education spending as a proportion
of GDP. UK private education spending as a proportion of GDP is
lower than the USA and Japan, but higher than that of France and
Italy.
Table 1
INCREASES IN VARIOUS COMPONENTS OF PUBLIC
SPENDING IN THE UK
|
| Average annual real increase in spending over:
|
| Long-term trend
| Conservative
years April 1979 to March 1997
| Labour years
to date April
1997 to March
2005
| Labour 1st
parliament
April 1997 to
March 2001
| Labour 2nd
parliament
April 2001 to
March 2005
| Labour
spending plans
April 2005 to
March 2008
|
|
| Social security | 3.7
| 3.5 | 2.3
| 1.1 | 3.5
| 1.0 |
| NHS | 3.7 |
3.1 | 6.1
| 5.0 | 7.1
| 7.2 |
| Education | 4.0
| 1.5 | 4.8
| 2.7 | 6.8
| 3.8 |
| Defence | -0.3
| -0.3 | 1.0
| 1.7 | 0.4
| 1.3 |
| Transport | n/a
| 0.5 | 5.1
| -4.9 | 16.2
| 2.5 |
Public order &
safety | n/a
| 4.1 | 4.9
| 3.2 | 6.6
| 3.1 |
Total spending
(TME) | 2.6
| 1.5 | 3.0
| 1.7 | 4.4
| 3.5 |
| Current spending | 2.8
| 1.7 | 2.8
| 1.7 | 3.8
| 2.9 |
| Net investment | -0.2
| -4.6 | 13.4
| -2.2 | 31.4
| 16.2 |
| National income | 2.5
| 2.1 | 2.8
| 3.2 | 2.4
| 2.6 |
|
Source: Education spending 1996-97 to 2007-08: Authors' calculations based on Public Expenditure Statistical Analyses 2005 Tables 1.11 and 3.2, and GDP deflators from 30 June 2005.
All other figures on this table are derived from C. Emmerson and C. Frayne, April 2005 "Public Spending", IFS Election Briefing Note http://www.ifs.org.uk/bns/05ebn2.pdf, whose sources are HM Treasury, Budget 2005. HM Treasury, Public Expenditure Statistical Analyses 2005 and previous PESAs; Office for National Statistics, Blue Book; HM Treasury Public Spending Statistics; Department of Health Annual Report; Office of Health Economics; HM Treasury, 2004 Spending Review and previous Spending Reviews.
Note that the Department for Education and Skills Departmental Report 2005 cites planned real annual average growth in education spending between 2004-05 and 2007-08 of 5.0%—this figure covers just England, rather than plans for the UK as a whole.
|
Figure 1
Table 2
SPENDING ON EDUCATION IN SELECTED MAJOR ECONOMIES, 2002
|
| Total Education spending,
% GDP
| Public Education Spending,
% GDP
| Private Education Spending,
% GDP
|
|
| Japan | 4.7
| 3.5 | 1.2
|
| Italy | 4.9
| 4.6 | 0.3
|
| Germany | 5.3
| 4.4 | 0.9
|
| UK | 5.9 |
5.0 | 0.9
|
| France | 6.1
| 5.7 | 0.4
|
| USA | 7.2 |
5.3 | 1.9
|
|
| Source: OECD, Education at a Glance, Paris, 2005
|
2. TRENDS IN
ELEMENTS OF
EDUCATION EXPENDITURE
IN ENGLAND
Categories of education spending compared
Table 3 shows the real average annual growth rates of the
different components of education spending between 1997 and 2005
in England, also decomposed by Labour's two terms of office. The
components that saw the most rapid average growth over the entire
period were the Under 5's (9%), Schools' Capital (11.9%), Schools'
Other (9.7%) and Further Education (5.3%). Primary and Secondary
current expenditure have seen nearer to the average growth in
education spending over the entire period (4.4% and 5.1% respectively).
It is noteworthy that Higher Education spending has grown by an
average of only 1.2% between 1997 and 2005. Equally notable is
the fact that real spending on Student Support has actually fallen
by an average of 3.7% per year over the period.
The relative priorities identified above are similar across
both terms, but with significant increases in most components'
growth rates for the period 2001-05 compared to 1997-2001. The
only exception is Further Education, which saw very low growth
in Labour's first term, but has seen substantial year on year
growth of more than 10% since 2001. The 10.8% average increase
in administration and inspection since 2001 is also quite striking
and is probably largely due to an increase in inspection activity.
Plans going forward to 2008 are not provided on a consistent
basis by spending category and so we do not analyse them here.
Table 3
EDUCATION SPENDING GROWTH 1997-2005 BY COMPONENT IN ENGLAND
|
| Average annual real increase in spending over:
|
| Labour years to date April 1997 to March 2005
| Labour 1st parliament April 1997 to March 2001
| Labour 2nd parliament April 2001 to March 2005
|
|
| Schools, current | 5.7%
| 4.8% | 6.7%
|
| Of which: | |
| |
| Under 5s | 9.0%
| 7.4% | 10.7%
|
| Primary | 4.4%
| 3.2% | 5.5%
|
| Secondary | 5.1%
| 3.3% | 6.9%
|
| Other | 9.7%
| 14.3% | 5.4%
|
| Schools capital | 11.9%
| 10.5% | 13.3%
|
| FE | 5.3% |
1.3% | 9.5%
|
| HE | 1.2% |
-2.1% | 4.6%
|
| Student Support | -3.7%
| -3.9% | -3.4%
|
Admin &
Inspection | 1.4%
| -7.2% | 10.8%
|
| Total | 4.8%
| 2.8% | 6.9%
|
|
Source: Authors' calculations based on Departmental Report 2005, Department for Education and Skills, Cm 6522, London:TSO, Table 12.3
From 1999-2000, a portion of local authority administration and inspection costs is delegated to schools and is included within the school current expenditure lines. These figures in part reflect the transfer of responsibilities for early years inspection from local authorities to Ofsted. This largely explains the apparent large drop in administration and inspection expenditure between 1997 and 2001 and means that the true annual average real growth rate between 1997 and 2005 is also artificially depressed.
|
3. THE BALANCE
OF SPENDING
PER HEAD
ACROSS DIFFERENT
STAGES OF
EDUCATION
Figure 2 shows the revenue funding per student in England
figures published by the DfES in its departmental report. However,
these only decompose education spending per student into Schools
(ages 3-19), Further Education and Higher Education, making more
detailed analysis of spending across the life-cycle problematic.
They do show that there has been steady growth in both Further
Education and Schools funding per student, with little growth,
if any, in Higher Education spending per student—closing
the gap between Higher and Further Education spending per student.
(Note that the figures DfES provide for Higher Education spending
per student include private as well as public contributions to
tuition fees, whereas the other categories cover only public expenditure).
Figure 3 shows current spending per head of the population
in the Under 5's, Primary and Secondary sectors in England, as
opposed to current spending per student, which would not capture
the increased coverage of Under 5's provision. It shows that when
Labour came to power in 1997 spending per head sloped upwards
by age. However, the rapid growth in the under 5's sector, as
seen in Table 3, has led to the development of a U-shaped spending
pattern per head across school ages. Although the Further Education
and Higher Education spending per student shown in Figure 2 are
not entirely comparable to the spending per head figures in Figure
3, their values do give some further support to the idea of a
U-shaped spending pattern, with the most support provided at the
earliest and then the later stages of the education system.
Figure 2
(Source: Departmental Report 2005, Department for Education
and Skills, Cm 6522, London:TSO, Table 12.5,12.6,12.7). Figures
presented in 2003-04 prices.
Figure 3
Source: Authors' calculations based on Departmental Report 2005,
Department for Education and Skills, Cm 6522, London:TSO, Table
12.3 for current education spending figures. Population figures
are taken from the 2001 census (from the ONS website). Figures
are presented in 2003-04 prices. For example, spending per head
for the under 5's was calculated by dividing expenditure on the
under 5's by the total number of three and four-year-olds in the
population.
International comparisons
Table 3
SPENDING PER STUDENT ON EDUCATION BY CATEGORY
|
| Spending per student, relative to the UK
| Spending per student per unit of average income, relative to UK
|
| Under 5's
| Primary | Secondary
| All tertiary | Under 5's
| Primary | Secondary
| All tertiary |
|
| Japan | 44 |
119 | 107
| 99 | 48
| 122 | 113
| 105 |
| Italy | 64 |
140 | 116
| 74 | 72
| 150 | 126
| 80 |
| Germany | 59
| 88 | 108
| 93 | 66
| 94 | 113
| 100 |
| UK | 100 |
100 | 100
| 100 | 100
| 100 | 100
| 100 |
| France | 53 |
98 | 130
| 78 | 55
| 100 | 135
| 83 |
| USA | 93 |
156 | 140
| 174 | 76
| 122 | 109
| 139 |
|
Notes: Indices for spending per student are taken from figures that were converted into US dollars using purchasing power parities. Spending per student per unit of average income is calculated as spending per student by sector as a proportion of GDP per capita. Italy's figures only include spending on public institutions and the USA's figures only include spending on public and independent private institutions.
Source: OECD, Education at a Glance, Paris, 2005
|
Table 3 shows spending per student and spending per student
as a proportion of GDP per capita, relative to the UK, for selected
OECD countries. It shows that the UK spends slightly more per
student in the primary sector than France and Germany, but quite
a lot less than Japan, Italy and the USA. In the secondary sector,
the UK spends much less per student compared to other OECD countries.
The UK does spend more per student in the tertiary sector relative
to other European countries, in absolute terms and relative to
average income. However, the biggest spender per head in the tertiary
sector is the USA. The most interesting result is that in comparison
with other OECD countries, the UK spends substantially more per
student in the under 5's category. Moreover, the under 5's is
the only category where the UK outspends the USA.
The latest OECD data on education spending also confirms
that the UK has a U-shaped spending pattern across the lifecycle.
Moreover, they suggest that the UK is quite unique in its U-shaped
spending pattern, spending more per student than other countries
in the tertiary and pre-primary sectors, but less in the primary
and secondary sectors.
4. EARLY YEARS'
EDUCATION
The Government launched its 10-year childcare strategy in
December 2004. Implementing this strategy will undoubtedly mean
that the trend towards increasing expenditure on the under-5s
will continue.
The Department for Education and Skills estimates that total
expenditure on education for 3- and 4-year-olds is currently around
£2.7 billion per year, of which approximately £1.1 billion
goes towards providing free part-time nursery places.[14]
We have estimated that the 10-year strategy could approximately
double the annual cost of free nursery provision.
A major challenge in implementing the strategy will be in
expanding the sector whilst maintaining and improving the quality
of provision. Here the development of the childcare sector workforce
will be key. Although a transformation fund has been set aside
to help achieve this goal, it is not clear how this will operate,
nor how any incentives it puts in to place will be maintained
once the transformation fund winds down.
Another challenge will be ensuring that the new provision
actually reaches the groups of children and parents the Government
is trying to target. Much of the expansion in early years' services
is being driven by supply-led initiatives, where the Government
provides subsidies to providers to start-up or further expand
their early years' provision. The Neighbourhood Nurseries Initiative
and Children's Centres are examples of these. Initiatives such
as these are designed to ensure that provision is set up in areas
where there is perceived to be the greatest need; however a real
concern is that it is still the better off parents in these areas
who disproportionately gain access to these services. With demand-
side initiatives such as the childcare element of the WTC, it
is much easier for government to better target the subsidy at
the families and children that they see as most in need, but if
there are problems with take-up, or there is not suitable or affordable
childcare available then again their policy objectives will not
be met.
It will also be important to monitor how the roll-out of
the 10-year Childcare strategy impacts on children as they move
through the education system. We are concerned that simple and
relatively inexpensive mechanisms that will enable the DfES to
monitor the impact of this strategy are not in place. For instance
the DfES keeps individual pupil level annual census data (PLASC)
data on all children in state schools, combined with data on attainment.
However we feel that it is a matter of urgency that:
— Every 3 and 4-year-old child receiving a component
of free nursery provision should be included in PLASC including
children in the Private and Voluntary sectors (at present only
those in free nursery education places where these nurseries are
attached to schools are included). Given that all providers
currently have to give LEAs information on children and hours
in order to receive the subsidy, we feel that the increased administrative
burden would be minimal.
— Foundation profile records should be collected
centrally for all children starting school, not just the 1 in
10 sample as currently used by DfES. Again, there should be minimal
additional cost arising from the inclusion of all children.
These measures would ensure that DfES can use administrative
data to monitor the effects of the early education system on children
as they move into school and beyond; this would be of huge benefit
to informed policy-making in the future.
5. SCHOOLS
As seen from Table 3 the UK, relative to the other OECD countries
highlighted, lags behind in terms of Primary and Secondary school
spending per student. From Figure 3 we see that there has been
a substantial increase in spending per head in the Under 5's sector;
this combined with more modest increases in Primary and Secondary
schools has led to a U-shaped spending pattern across age groups.
This is of particular concern since there is strong evidence that
early investment in education reaps the greatest long-term benefits
(Carneiro and Heckman, 2003[15]).
The Government seems to have acted upon this evidence with respect
to the Under 5's, but not with respect to primary schools. There
is a risk that not enough investment in primary school education
will lead to an inability to sustain the gains that are intended
to arise from the increase in Under 5's expenditure.
One thread of recent government policy is to encourage successful
schools to expand to allow as many children as possible to gain
a place. However it is important to realise that while specific
funding mechanisms exist to allow successful secondary schools
to apply for funding to cover the capital costs of expansion,
the same is not the case for primary schools (for example, see
Hansard 21 June 2005, Column 1023W).
6. FE AND ADULT
EDUCATION
From Figure 2 we can see that the Further Education sector
has enjoyed large real increases in funding since 2001, along
with other areas of education spending. However we have some serious
concerns about the policy emphasis on qualifications in this sector,
embodied in the DfES PSA target to "reduce by at least 40%
the number of adults in the workforce who lack NVQ 2, working
towards this, one million adults in the workforce to achieve level
2 between 2003 and 2006."
Whilst there is clear evidence on the returns to qualifications
obtained at school and at Higher Education institutions, the current
evidence suggests that many intermediate vocational qualifications,
especially NVQs at Level 1 and Level 2 do not confer any wage
benefits on most recipients (see Dearden, McGranahan and Sianesi,
2004[16]).
The targeting of qualifications in this context seems in
part to reflect a belief on the part of government that policy-makers
are well placed to predict the country's skill needs, and that
left to themselves, learners and employers will pursue the wrong
skills, or not learn or train "enough". It is also,
however, a manifestation of the more general audit culture in
which any form of public expenditure is tied to measurable targets.
Qualifications are far easier to measure than learning, but the
current evidence on the lack of returns to such qualifications
suggests that despite best intentions, public expenditure in this
area may not be providing best value for money.
7. HIGHER EDUCATION
REFORMS
The reforms to Higher Education funding, which are due to
be fully implemented by 2006-07, will require considerable additional
funds from the public sector, alongside the increase in graduate
contributions through top-up fees. Based on the latest DfES cost
estimates, we calculate the additional annual taxpayer costs associated
with the reforms to be £1.2 billion per year. Most of this
will pay for the extension to student loans, which, it should
be noted, are "off balance sheet" expenditures, and
will not score as spending when assessing the Chancellor's fiscal
rules. The rest will pay for new student grants.
A major concern about this expenditure is the unnecessarily
complicated design of the new system of student support that it
will pay for. As we set out in submission to DfES in April 2004[17],
the new system will involve a combination of five different income
tapers, with the maximum amount of maintenance loan of £4,405
advertised by DfES available only to students with family income
of exactly £33,560. There are two main problems with this
design:
— The unnecessary complexity of the new system is
particularly concerning given how important it is for young people
to be able to understand the new funding system being put in place.
There is a real danger that the lack of transparency in determining
eligibility to student support (in particular the split between
loans and grants for any individual) will mean that the extra
money being provided fails to have its desired effect in encouraging
young people to stay on at university.
— It is also extremely concerning that compared
to the system it is replacing, it is students from parental incomes
between £22,100 and £26,000 who will expected to make
the biggest additional net contribution to the cost of their tuition
and maintenance, taking into account both new fees and student
support (see Figure 4). Depending on the level of the top-up fee,
and on their exact circumstances after they graduate, students
from this parental income range will have to contribute around
£750 more per year towards the cost of their education (compared
to the "pre-White Paper" system in place in 2003-04).
By comparison, those from the poorest backgrounds will be more
than £1,000 better off, and those from the wealthiest backgrounds
will be around just £500 worse off. This pattern arises simply
because of the way that the maintenance loans and grants are due
to be tapered, and could easily be avoided if the system were
re-designed in a cost-neutral way. It should be noted that the
£22,100-£26,000 income range is a particularly dense
part of the income distribution with parents largely in the 2nd
and 3rd income deciles—arguably it is exactly students from
these families that the Government is trying to encourage rather
than dissuade from attending university.
Figure 4
Note illustration is for student in first or second year living
away from home outside of London. Calculations available from
authors.
September 2005
14
Data released in response to Freedom of Information request on
16 March 2005. Back
15
Carneiro, P and Heckman, J (2003), Human Capital Policy,
NBER Working Paper No 9495. Back
16
L McGranahan, B Sianesi and L Dearden, "The role of credit
constraints in educational choices: evidence from the NCDS and
BCS70," December 2004, CEE Discussion Paper No 48. Back
17
Dearden, L, Fitzsimons, E and Goodman, A (2004) Fine-tuning the
HE reforms. http://www.ifs.org.uk/docs/fine_tuning.pdf Back
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