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Modelling New Zealand's Long-term Fiscal Position - PP 06/01

Non-parametric programmes - Education

Over the past decade, total education spending has grown by an average of 6.2% a year. 

An area of recent, rapid growth is spending on education. Over the past decade, total education spending has grown by an average of 6.2% a year. Nominal growth over the past half century 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. At present, spending on primary and secondary schooling takes about half of the education sector spending, while tertiary has about a third.

Here we assume that education spending depends in general on the wages per teacher, the student-teacher ratios, the enrolment rates and the population of potential students. The parameter is spending per full-time equivalent student which is the average wage per teacher increased by the standard real growth factor - 1.5% a year as we are assuming that the other ratios remain constant through the projection period.

We use this simple modelling approach to project forward all levels of education, apart from tertiary, using the growth of the population base, inflation and a real per-student growth factor of 1.5% (based on teachers’ wages) each year:

where E = expenditure, d = growth of the appropriate demographic group, i = the inflation rate and s = real growth per student.

The demographic groups are: ages 1-4 for early childhood education, 5-17 for primary and secondary, and 18-30 for tertiary. These age groups are projected to reduce in size over the next half century. The last two terms in the equation allow for the growth of nominal expenditure per student.

Tertiary 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 - participation18-30). This is intended to capture the offsetting effects of changes in labour market participation on enrolment rates and the growth of the main tertiary cohort of 18-30 year olds.

The number of equivalent full-time tertiary students rose rapidly from 169,000 in 1999 to 245,000 in 2003 (the ratio of EFTs to the 18-30 cohort rose from 24% to 35% over this period).[30] Our base case projection implicitly assumes that the tertiary enrolment rate remains at the current rate through the projection period, apart from the small movement due to changes in the labour market participation.

The projection also assumes that we capture savings from the falling numbers of students at all levels as the population ages (see Figure 18). There are, however, several reasons why this may not happen. As a society, we may demand higher teacher-to-student ratios or we might see a greater trend towards publicly-funded “life-long learning.” However, the cost of extra training on the job (of older workers, for example) may possibly be paid for largely by the private sector.

Figure 18: Demographics reduce the projected GDP share of education spending
Figure 18: Demographics reduce the projected GDP share of education spending.
Source: The Treasury

Non-parametric programmes - Core government services

Core government services expenditure includes the costs of running departments such as Inland Revenue, State Services Commission, Ministry of Foreign Affairs, Treasury, Statistics, and Overseas Development Assistance, etc. This category of spending has no clear relation to ageing of the population.

Figure 19: Core government services projected to grow with GDP
Figure 19: Core government services projected to grow with GDP.
Source: The Treasury

This is modelled as follows:

where Et = spending, = growth in employment, i = the inflation rate and g = wage growth, which is fixed at 1.5% per annum. This is the growth form of an equation where spending depends on the number of public servants times the average nominal wage and we assume that the number of public servants is a fixed proportion of total employment. This growth tracks that of the labour force and hence the ratio of spending to GDP is fixed.

Notes

  • [30]The 2005 Speech from the Throne signalled a move away from increasing participation in some parts of the tertiary sector to a greater focus on quality and relevance in those parts of the sector.
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