Sunday, October 14, 2012

Expenditure on education is 9 percent of total government expenditure or 1.8 percent of GDP?


by Usvatte-aratchi

One or two of my acquaintances have talked to me of confusion as to the content and significance of the numbers about expenditure on education thrown about by many people including entirely ignorant ministers and other worthies. Symptomatic of this common malady was a harangue on TNL TV on 01 October 2012 on these numbers by some Minister. He did not know what numbers he was talking about and consequently put out some complete gibberish. Unfortunately, neither others on the panel nor the anchor intervened to say that the Minister was talking bullshit. [See Harry G. Frankfurter, On Bullshit, Princeton University Press, Princeton, 2005.] Even university teachers exhibit this confusion when they pontificate on television. I want to try to dispel that confusion.

Take total government expenditure in a year. This number is available to you from the Annual Report of the Central Bank of Sri Lanka every year. The Central Bank gets its figures from government accounts. When a budget is presented to Parliament, well before the money is spent, the Central Bank uses the figures in the Estimates of Government Expenditure, presented to Parliament along with the Appropriation Bill. Shortly after the financial year ends, there are provisional figures of account of government expenditure. These are provisional figures of government expenditure. The actual figures will not be available until a year after expenditure had been incurred. These are actual figures of expenditure. All these figures, whether estimates, provisional or actual have their uses. They all appear in the Central Bank Annual Report and other documents.

You are interested in how much was spent on education, what proportion of that was on general education and what on higher education and on other sectors of expenditure. This classification is done in the Economics Research Department of the Central Bank. This is a classification of government expenditure by function: Defence and Public Safety, Health, Housing, Industry and so on. This classification is mainly to examine priorities of government expenditure. How much does government spend on education? How much does it spend on health? How much does it spend on defence and public safety? How do you justify these priorities? Why do you spend 17 percent of all government expenditure on defence and public safety when you spend 6 percent on health and 9 percent on education? Without this information you would not have been able to frame those questions intelligently.

What goes into education in this ‘education classification’? The common misapprehension is that only the expenditure under the heads of the Ministry of Education and the Ministry of Higher Education go into that category. Quite wrong. The staff at the Bank take about 4 to 6 weeks to go through the estimates or accounts under all heads of expenditure, identify those items of expenditure for education and put all those under the category ‘education’. The expenditure of the Ministry of Defence running a university in Ratmalana will appear in the category ‘education’ and not under the category Defence. Similarly, the expenditure for the Sagara University in the Ministry of Fisheries will come in the education category and not in economic services category. Any expenditure on systematic teaching and learning in any ministry, say the Ministry of Rural Development or Cultural Affairs Ministry or any other will come under the education classification. So the total of government expenditure on education in the Estimates or Accounts, wherever they appear, is put in the category education and one must not be misled by government propaganda that there is more spent on education by government than appears in that category education. It contains all, if the Bank Staff have done their job properly.

The manual of instructions for this classification is the IMF Manual of Instructions for the Classification of Government Accounts supplemented by the UN System of National Accounts. As all governments follow these same manuals, the classifications can be compared among countries, confident that we are comparing apples with apples and not with kaju puhulang.

That confusion dispelled, why another set of figures relating the expenditure of government to GDP? [At times and in some countries the relationship is with respect to GNP. Ignore the difference in most instances. The distinction has other analytical uses.] Government expenditure on education in 2011 is 9 percent of government expenditure and 1.86 percent of GDP. Why this difference and what are the uses of two different numbers? Can’t we use one, the better comprehended proportion of government on education in total government expenditure? The answer to those questions is in two parts. First, it is not the government alone that spends on education. It is clear to the most casual observer that private parties spend on education outside what government spends. To know how much the nation as a whole [government and non-government] spends on education one must add government expenditure with that which the private sector spends on education. You cannot add the ratio of government expenditure to total government expenditure to the ratio of private expenditure on education in GDP. The two comparators [total government expenditure and GDP] are entirely different entities. It is meaningless to express private sector expenditure on education as a component of total government expenditure because it is not a component of government expenditure and you might arrive at the ridiculous position that the sum of the parts exceeds the whole. However, government expenditure on education can be expressed as a ratio of GDP; so can private expenditure as a ratio of GDP. Now we can add the two ratios to give the total expenditure of the nation on education. That is a useful number with its own applications.

The second part of the answer is that we need to compare expenditure on education among countries. Take this case. In country Urbania, total government expenditure is 10 percent of its GDP. It allocates 90 percent of its total government expenditure to education. Then in Urbania in government spends 9 percent of GDP to on education. [Non-government parties may spend another amount on education.] In Ruritania total government expenditure is 25 percent of its GDP and the allocation to education 50 percent of its total expenditure to education. In Ruritania, expenditure on education by government is 12.5 percent of GDP. Although in Urbania, government expenditure is massively higher than in Ruritania, government allocates more of the country’s resources to education than in Urbania. Government of Ruritania gives higher priority to education and must expect higher results. Because the ratio of total government expenditure to GDP varies widely among countries [ e.g.60 percent in Sweden, 21 percent in Sri Lanka and 10 percent in Japan] you cannot compare the ratio of expenditure on education to total government expenditure to get an idea of the priority given to education by government and by the nation. Comparing bare figures in local currencies [rupees and yen] is not meaningful. Converting them both to a common currency is not a convenient solution to the problem. The simplest and the most convenient comparison is among ratios of expenditure on education to GDP among countries. That is what most international agencies do.

The classification of government expenditure by function was published in the Central Bank Annual Report from about 1959 when Dr. Rasaputram began the computation of systematic National Accounts in the Report. This was massively improved upon as to method and accuracy by Dr. Ranji Salgado, whose work on National Accounts at Cambridge was recently published. However estimates of government expenditure by economic and functional categories remained unsatisfactory. They were systematically classified by the present writer and Dr.K.N. Rao of the UN in 1967-68 in the Ministry of Planning and Employment. It is that classification that is the foundation of work relating to the subject. That classification was improved upon and refined by Mr. Hema de Zoysa, Mr.H.M.R. Elleppola and Mr. Terrence Savudranayagam, all of whom headed the Public Finance Division in the Central Bank from time to time. But the true master of the classification was Mr. Mr.M.Vimalanathan [Vim to all of us] who actually did the classification mostly on his own. There was a very useful explanation of all this in a small book written by Mr.Terrence Savudranayagam after he retired from the Bank. [Someone borrowed my copy sometime ago and he has become ‘unacquainted’ with me since then.] So this classification which has recently become a football kicked about by everybody has a fairly long history is and not to be caviled at. Like all economic statistics these are all estimates and should never be thought of as ‘accurate’. For the same reason, it is a waste of time to work any ratio in this area beyond the first decimal point.

One last observation to show you that the ratio of government expenditure on education or any other category can be easily and quickly converted into the ratio of government expenditure on that category to GDP. We know that in 2011, the ratio of total government expenditure to GDP was 21 percent, that is the ratio of GDP to total government expenditure is the same as roughly five [5] is to one [1]. We also know the ratio of total government to government expenditure on education 100 is to nine [= 9 percent]. Now divide 9 into 5 and you get 1.8, which is the ratio of government expenditure on education to GDP. The expenditure of government on health in 2011 was 6 percent of all government expenditure. Following our rule of dividing that into 5, the ratio of government on health to GDP is 1.2 percent.

This is about all you need to talk about these ratios intelligently. Before you speak about them please read and understand them. Given the total ignorance of most government functionaries including ministers who speak on these and other economics matters, may I suggest that government conduct classes for ministers and other senior functionaries to demystify economics and social statistics with the help of universities, the Department of Census and Statistics and the Central Bank. What a splendid idea to scrap that misguided ‘leadership training programme’ [ Some one sent me a copy of the programme] and conduct this programme instead with that money, obviously not with the same people, to make our leaders in politics and the bureaucracy a little less confused and to prevent them from misleading the public.

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