THE ECONOMIC POLICY COMMITTEE ONGOING WORK ON LONG-TERM PROJECTIONS The case for education projections Andrea Montanino European Commission Directorate General Economic and Financial Affairs, Public Finances with particular reference to the euro zone IN the view of improving tools to assess LT sustainability of public finances, education is key. Around ¼ of age-related expenditure

Overview of the presentation The education expenditure projections and the debate on the Stability and Growth Pact Modelisation of education expenditure long-term projections Data requirement Focus on the methodology, but some empirical results

The reform of the Stability and Growth Pact Sustainability is a major concern More focus on long-term trends Need for reliable information on public expenditures trends

The institutional background for budgetary projections The EPC and the Ageing Working Group Mandate by the ECOFIN Council Stockholm (2001) and Barcelona (2002): « the Council should regurarly review the long-term sustainability of public finances » :   ECOFIN (2003) mandate to »complete a new set of long-run budgetary projections by mid-2005”

Budgetary projections Pensions Health care Long term care Education Unemployment benefits Age-related expenditures Demographic projections Macroeconomic scenarios

Peculiarities in education spending projections Education is not only public Education sector is heterogeneous Education spending can be carried out in different ways First, education is not only public. The State can provide directly the service through a system of public institutions entirely carried on by the State itself or it can finance private institutions through transfers to families or directly to the private institutions. However, education can be also carried out by private institutions which are not funded by the State. In the latter case, education represents an investment for families and not for the State. Second, education sector can be divided into at least two sub-sectors. In a first sub-sector education is compulsory and the vast majority of the population in the relevant age group is enrolled. In a second sub-sector education is instead an alternative to work. This implies that any future projections on enrolment have to take properly into account the likely development of labour force in the relevant age groups. This of course does not rule out that there are still frictions in the education and labour markets so that part of the targeted population is neither in education nor in the labour force. In addition, education is not only an alternative to work but it can be seen as a complementary activity because part time jobs can coexist with part-time education. This requires assumptions on the number of workers that are also students, so that they can be included in education expenditure calculations. Third, public education expenditure can be carried over through transfers or as public consumption (direct expenditure). The two ways of financing and providing public education needs different model approaches: while the latter can be assumed as a constant share of total expenditure in a no-policy change scenario, the former needs to take into account institutional factors.

Main results of 2004 projections (expenditure as a share of GDP)

The model: a summary (1)

The model: a summary (2) Differences respect the past exercise enrolment rate by age and education level to project over time the number of students expenditure per student decomposed at each education level by wages and other costs, current and capital Assumptions for the projections the staff-to-student ratio will remain constant over the projection period personnel wages will develop according to GDP per worker « other-costs » to student ratio remains a constant share of the expenditure per student

Data requirement and sources The projection exercise will rely on Eurostat financial and non –financial database for all EU-25 Member States as much as possible. Eurostat demographic projections enrolment rates by age and education level number of education personnel by education level Expenditure to GDP per education level (base year) and type (personnel or non-personnel) Share of transfer to private over total exp. (base year) Ageing Working Group of the EPC Macroeconomic assumptions (future) Employment (future) Participation rates by age groups (future)

Conclusions Education represents around ¼ of total age-related expenditure: important to project long term trends for long term sustainability of public finances When projecting public consumption, institutional factors cannot be excluded Functional form depends on data availability: important to have reliable and comparative financial and institutional data Important to have reliable information on labour market development for young cohorts (or at least consistent with likely trends in education) Savings will likely not materialise. Enrolment rates could increase.