Nova workboard

a blog from young economists at Nova SBE

Public Spending on Education: a few thoughts

Education is an area where government spends much of the taxpayer’s money. Most developed countries devote around 10-20% of public budgets to this purpose. It is, however, more illustrating to look at it in terms of percentage of GDP, in order to understand just how much of output do countries spend on education. Analysing by this method, one realizes that government education expenditure in advanced economies ranges from 7.8% in Denmark to 3.5% in Japan. The general picture is something in the middle, with the USA and the UK spending 5.5% of GDP with countries such as France spending slightly more (5.6%) and countries such as Germany investing less (4.5%).

How did countries get to spend this much in education? This is actually a recent phenomenon. Looking at figures from expenditure in education for the US in the beginning of the past century, it is clear that proportions were nothing like nowadays: in 1900, the US allocated 1% of GDP to education. After that, there is an increase in spending as percentage of GDP that only suffers a consistent drop in the 1930’s and then a greater decrease in the 1940’s, a consequence of the war effort. Later in the century, in the 1970’s, this figure stabilizes around 5-6% of output.

Why have countries started spending much more on education?  From the French Revolution on, many people have looked at education as a form of promoting orderly political behaviour and democratic participation in society. This was still a major reason for the state to promote education in some countries in the beginning of the twentieth century. For example, this was still very much the objective in widening coverage in the Portuguese First Republic, in 1910. Following this, laws that defined higher levels of compulsory schooling( supported by the creation of public networks of schools) raised levels of public investment up throughout the century. Later on, theories developed on the economic value of education for productivity. In 1958, Mincer introduced the term “human capital”, later the title of Becker’s book in 1964 that ultimately established the idea of education as an investment in such capital. Moreover, even Friedman supported the idea of public investment on education, although much more due to reasons related to promoting some set of common democratic values, and not particularly for productivity effects.

Nevertheless, how do we know if spending is enough, or too much? There is also a theory that formal education does not increase human capital, but that it instead serves as a signal of innate ability of people. Consequently, much money spent by society in general could be over-investment, if there are cheaper ways to signal productivity. Even assuming education raises productivity, later studies like Cooray (2009) indicate that the relationship between public spending on education and GDP growth is complex one and depends on the quality of the provision of education as on quantity. In conclusion, this only emphasizes the need of a broader discussion on how money is spent on education.

José Miguel Cerdeira – Student #628

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Author: studentnovasbe

Master student in Nova Sbe

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