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New Zealand's Long-Term Fiscal Position [June 2006]

7   Education

Public spending on education since the Second World War has been primarily occupied first in educating the baby boomers and building schools in which to teach them and, later, in catering for the growing participation of people of pre- and post-school age in our education system.

Over the next 50 years, with demography still an important driver, declining proportions of young in the population could mean that the quality of the education system could be maintained, while at the same time resources could be freed up to help pay for the growing demand from health and superannuation. Whether there will be such a fiscal dividend from education is far from certain.

This chapter looks at some of the past drivers of education spending and touches on the issues facing the major components of each sub-sector. It then outlines the approach taken to modelling future spending by sectoral level and the sensitivity of the results to some of the risks.

Over the past half century, public spending on education has grown two-and-a-half times as a share of GDP (Figure 7.1). Annual growth has averaged 10.9% a year (4.5% real growth a year), about 1.7 percentage points faster than nominal GDP growth over this period.[44] Over the past decade, when the data are more clearly operating, rather than capital expenditure, total education spending has grown by an average of 6.2% a year.

Figure 7.1 also shows that forces in addition to demography have been driving the growth in public spending on education as a share of GDP since the 1970s.

At present, spending on primary and secondary schooling takes about half of the public spending on education, while tertiary has about a third.

Looking ahead, demography is likely to change the shape of the education sector. Figure 7.2 shows the prime catchment ages for the different parts of the sector.

Student numbers depend on present enrolment rates and their evolution in the projection period. The number in the early childhood education pool is expected to fall by 11% between 2005 and 2050, primary by 10%, and secondary by 9%, while tertiary returns to 2005 levels after the early 1990s baby blips have completed their studies.

Figure 7.1: Public spending on education has more than doubled its share of GDP in the past half century.

Source: Statistics New Zealand

Figure 7.2: Change in numbers of people in sectors over the next 50 years.

Source: Statistics New Zealand Series 5 projection

On pure demographic grounds, spending for education services will fall over the projection period, provided costs per student stay constant (which means, in practice, teachers’ pay moving in line with that of the rest of the workforce).

Other factors are, however, at play. In the short-to-medium term, the public education sector is likely to see a continuation of the trends of the recent past. Some of the issues are:

  • schools built after the Second World War are now fully depreciated and the sector is facing large capital costs to replace them
  • population movements mean that schools are now not always in the areas where families are. Recent experience is that it is difficult for resources to be shifted completely to where the children are
  • there could be shifts in the boundary between public and private schooling, placing greater pressures on the fiscal position
  • the number of students going on to tertiary education has stopped growing, perhaps because of the strong labour market
  • the median age of students has risen because of growing attendance by people over 40. While these numbers are as yet small in the overall picture, they may become more significant with the ageing of the population and rising demands for moving in and out of education throughout life
  • the need to improve productivity performance could place greater demand on the public sector for job-related training.

Drivers of the future and modelling assumptions

Basically, for each education sector, future public spending is just the expected cost per student times the projected number of students. More specifically, the general form for modelling each sector is:

Spending = [teachers’ average wage*(teacher/student)]*[enrolment rate*population for sector].

The assumption here is that labour costs are the only, or the dominant, driver – or are a fixed proportion of total costs. In fact, labour costs make up about 80% of the operating expenses in schools. Hence, more accurately, for each education sector:

Spending = (total spending/teachers’ labour costs)*average wage*(teacher/student)* enrolment rate*population for sector.

If, in the base case, the proportion of total costs to labour is assumed to be fixed and the student-teacher and enrolment ratios are fixed (including the mix of full-time and part-time tertiary students), then in growth terms:

New spending = old spending*(new wage/old wage)*(new population for sector/old population for sector).

Based on this, a simple modelling approach is used to project forward all levels of education (with a slight variation in tertiary), using the growth of the age-group base, inflation and a real per student growth factor of 1.5% each year based on the real wage of teachers. This wage is assumed to grow at the same rate as for the whole economy and be equal to productivity growth.

Et = Et-1 x (1+i) x (1+w) x (1+d),

where

E = expenditure,

i = the inflation rate,

w = real wage growth, and

d = growth of the appropriate age group.

Here the appropriate sectoral age groups are 1 to 4 for early childhood education, 5 to 17 for primary and secondary (largely the compulsory sector) and 18 to 29 for tertiary. (The tertiary age group has been expanded to the late 20s because a growing proportion of tertiary attendance is being drawn from those older than the traditional prime catchment ages of 18 to 24.) As noted above, these groupings tend to reduce in size over the next half century. The base modelling assumes that enrolment rates from each of these age groups remain as they are now. Sensitivity scenarios later examine the effect of changing this assumption.

Tertiary spending has an extra growth driver. In this case, E is tertiary spending (plus student loan write-offs) and the extra growth driver is the growth of (1 - part18-29), where part18-29 is the participation rate of the 18-to-29-year olds. For those aged 16 and older, working is an alternative to attendance in upper secondary and tertiary education and so rising demand from the labour market will reduce enrolment.

The student loan scheme is assumed to continue.

Figure 7.3: Projected education spending falls as a share of GDP.

Source: The Treasury. The spike in 2006 is the write-off of student loans

Risks to these projections

These projections depend on the demographic projections, the risks to which are outlined in Chapter 4.

The spending per student could rise faster than the assumed labour productivity growth (wage per worker) and that would limit any gains released from the public education sector. Enrolment rates might rise, rather than remain where they are at present. More and more tertiary students could come from those middle-aged and older.

The requirement for stronger aggregate productivity growth may put on pressure for more technical training, publicly funded rather than funded privately by firms.

Rising wealth may increase the demand for life-long learning and produce an ageing of the tertiary student population.

Notes

  • [44]The box in Chapter 1 about data quality is particularly pertinent here; data before 1994 may also include capital costs of building those post-war schools.
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