Practice Advice on Public Financial Management
(OECD and IMF)
Summary Advice (OECD - Choosing Fiscal Consolidation): The OECD suggests that structural reforms that improve efficiency in the delivery of public services can reduce the adverse growth impact of spending cuts in productive areas of government spending. Similarly, the negative equity impact of spending cuts can be headed off by structural reforms that ensure a better targeting of public services and transfers and stimulate labour supply.
Summary Advice (OECD - Fiscal Consolidation): Work by the OECD has examined the opportunities to improve the efficiency of service delivery for health and education (similar savings are likely to be available in other spending programmes, see Hagemann, 2012). These are important spending programmes accounting for about a quarter of government spending or on average across OECD countries around 10% of GDP between education and healthcare.
Summary Advice (IMF): The IMF suggests that the key to accommodating increased demand for education without jeopardizing educational outcomes is to enhance the efficiency of education spending by containing the growth of per pupil spending. Adjusting class sizes to demographic trends, rationalizing the education wage bill, and increasing information on alternative educational outcomes, as well as fostering competition among providers, can help achieve this goal, although the government should maintain a key presence as provider and regulator of education services.
Main Points (OECD - Choosing Fiscal Consolidation):
In education, structural reforms can bring benefits along all fiscal, growth and equity dimensions. For instance, introducing tuition fees in higher education coupled with means-tested grants or loan guarantees can improve public finances, possibly spur growth by encouraging tertiary schooling completion and educational investment in areas with greater economic potential and help to correct the regressive impact of public spending on tertiary education (Hagemann, 2012).
In primary and secondary education, a recent update of the analysis conducted by Sutherland et al. (2007) points to potentially sizeable efficiency gains in many OECD countries (Figure 8).14 In tertiary education, European OECD countries can potentially obtain savings from efficiency gains worth around 0.4% of GDP on average (St. Aubyn et al., 2009). Earlier and more recent OECD work has suggested that more performance monitoring, more school autonomy and greater user choice is associated with greater efficiency in the public provision of primary and secondary schooling (Sutherland and Price, 2007, Frederiksen, 2013). As it turns out, countries with the greatest potential for efficiency gains are generally not the ones with the largest consolidation needs, with the exception of the United States. However, in the United States, the need to address widening skill gaps identified in particular in the 2012 OECD Economic Survey points to a case for allocating efficiency gains to providing more and better education rather than cutting expenditure (OECD, 2012b).
Cuts in government investment or education that respectively focus on low-externality projects or are accompanied by education reform can have more limited, or even favourable, growth effects.
Main Points (OECD - Fiscal Consolidation):
For primary and secondary education, schools adopting best practice measures could realise important savings, up to around 1% of GDP in some cases (Sutherland et al., 2007). The estimates for school savings are based on benchmarking individual school performance against the best-performing schools with similar student populations and resources (using data envelopment analysis). The implications of reducing inefficiency are then translated into aggregate resource savings by the implied possible reduction in staffing costs.
Main Points (IMF):
Education reform should seek to raise the social return to education spending. Assuming school enrollment rates and spending per pupil continue to increase, and taking into account the projected school-age population, education spending would increase by 0.7 percentage point of GDP in advanced economies and 0.6 percentage point in developing economies through 2030. Given these demographic factors and enrollment rate goals, education reform should focus on enhancing the efficiency of education spending, that is, contain per pupil spending without jeopardizing education outcomes. This should be feasible: the correlation between education spending and standardized test scores, after controlling for income levels, is weak (Bruns, Filmer, and Patrinos, 2011). Preventing an undue increase in the teacher-to-pupil ratio and rationalizing class sizes in advanced economies would yield potential fiscal savings. The Netherlands provides a good example, where a per student financing formula is used to budget education outlays. In addition, a rationalization of the wage bill could generate savings that could be used to enhance the quality of school infrastructure and teaching materials. For example, teachers’ salaries may be well above the level required to retain high-quality teachers, or average teaching hours could be relatively short. Measures to rationalize the education wage bill have already been introduced in several advanced economies in Europe (EC and EPC, 2012).
Structural reform of the education system can also improve educational outputs by enhancing incentives for educational institutions. No “one-size-fits-all” set of policies exists, but options include (1) providing students with a wider choice of schools and promoting competition among schools; (2) further decentralizing the formulation and implementation of education policy (e.g., granting decision-making authority to local schools), although sufficient institutional capacity is needed to implement this policy effectively; and (3) increasing transparency and accountability, for instance, by making performance indicators for individual schools (e.g., results of standardized exams) available to the public. These policies have been implemented in several economies (school-based management in Australia, El Salvador, and the United Kingdom, for instance). Studies have found that these structural reforms improve students’ learning outcomes if implemented appropriately (Bruns, Filmer and Patrinos, 2011; Hanushek and Woessmann, 2011).
Investing more in lower levels of education and increasing private financing of tertiary education could help enhance the distributional impact of education spending. In many economies, education spending benefits higher-income groups disproportionally. In developing economies, this regressivity reflects lower access by low-income groups to higher levels of education (including upper secondary and tertiary education). In advanced economies, although education spending as a whole is progressive, tertiary education spending tends to be regressive.
Source: OECD (2013). OECD, "Choosing fiscal consolidation instruments compatible with growth and equity" OECD Economic Policy Papers No. 07, at http://www.oecd-ilibrary.org/content/workingpaper/5k43nxq6dzd4-en (accessed 26 April 2014) and OECD (2012). OECD, "Fiscal Consolidation: How Much, How Fast and by What Means?" OECD Economic Policy Papers No. 01, at http://www.oecd-ilibrary.org/economics/fiscal-consolidation_5k9bj10bz60t-en (accessed 28 April 2014) and IMF (2014). IMF, “Public Expenditure Reform: Making Difficult Choices” IMF Fiscal Monitor, at http://www.imf.org/external/pubs/ft/fm/2014/01/pdf/fm1401.pdf (accessed 25 April 2014).
Page Created By: Matthew Seddon on 28 April 2014. The content presented on this page is drawn directly from the source(s) cited above, and consists of direct quotations or close paraphrases. This material does not necessarily reflect the official view of the publishing organization.