10.2 Education expenditure in Shandong, 2018

TABLE 10.2 Education expenditure in Shandong, 2018

SHANDONG PROVINCE PREFECTURE OF RIZHAO

Total government expenditure

LEVEL (¥, BILLION)

1,010.1

SHARE (%)

Total government expenditure Provincial 90.9 9.0 Prefectural

LEVEL (¥, BILLION)

25.96

SHARE (%)

1.12 4.3

Subprovincial 919.2 91.0 County level 24.83 95.7 Government educational expenditure 200.7 Government educational expenditure 5.39

Provincial 23.1 11.5 Prefectural 0.86 15.9

Subprovincial 177.5 88.5 County level 4.53 84.1

Source: Shandong Provincial Department of Finance and Rizhao Municipal Bureau of Finance. Note: Some columns do not total because of rounding. ¥ = Chinese yuan.

Other government expenditure may have become more decentralized than educational expenditure, which would be a reversal of the overall national situation in 2007. We cannot be sure whether this is true elsewhere, but it is consistent with the central government’s attempt to reduce the degree of decentralization in the education sector after 2005.

Changes over time

China’s education finance system has always aimed to promote adequacy and equity of education finance and provision. Adequacy is defined as the expenditure of sufficient funds to attain the desired level of educational development in a given region or nationally. Equity is defined as achieving a more even distribution of educational resources and outcomes among regions and schools. Resource constraints often force governments to choose between equity and adequacy and to focus on only one objective at a time, shifting the focus when the balance changes significantly.

In the wake of the economic reform that started in 1978, education policy makers prioritized adequacy, which was consistent with the emphasis of efficiency or economic growth for other major policy reforms. The decentralization of education finance and the diversification of financing sources (or marketization) were two defining features of the reforms (Tsang 1996; Ngok 2007). The reforms were very effective in mobilizing various resources to develop education, but decentralization was blamed for the glaring surge in educational inequity in the 1990s, which resulted from substantial regional disparities in economic development (mok 2001; Hanson 2000). The central government switched its focus to combating inequality in the 2000s and, in the process, reversed the trend of decentralization in education financing.

The change in the decentralization structure was marked by the turning points in the mid-1980s and the early 2000s, both of which had a remarkable impact on compulsory education. Before the mid-1980s, China had a highly centralized fiscal system with a narrow revenue base, consistent with a planned economy. In the mid-1980s, the structure of education finance was rapidly

decentralized, and the revenue base was diversified and marketized. This restructuring, prescribed in the Compulsory Education Law of 1986, was driven by a scarcity of resources for educational investment and a rising demand for education (Ngok 2007). The change gave local governments the authority to administer local schools and shifted financing responsibility downward, with each level of government trying to devolve the financing responsibility to its subordinate governments. The usual structure was that primary schools were mainly financed by villages, junior high schools by townships, senior high schools by counties, and higher education by provinces (Ngok 2007; Tsang 1996). According to a survey carried out by the State Council in 1998, 78 percent of compulsory education costs were paid by townships and villages, 9 percent by counties, and 11 percent by the provinces, with only 2 percent borne by the central government.

The financial burden on the grassroots governments incentivized them to mobilize all kinds of resources to finance education, including encouraging the development of nonpublic education (Hu 2012). Nevertheless, many townships and villages failed to collect adequate revenue for education, which was the main reason for the glaring disparities in education development across regions in 1990s (mok 2001; Hanson 2000). many students in poor rural areas suffered as a result of the inferior education and dropped out of school (Ngok 2007). In 1995, expenditure per student in the highest-spending province was 8.6 times of that in the lowest-spending province for primary education (¥ 1,248 versus ¥ 145), and 5.0 times of that for junior high education (¥ 1,595 versus ¥ 322 yuan). The gross enrollment rate in junior high school was only 78 percent in 1995. These statistics propelled China to launch the massive Compulsory Education Project for Poor Regions in 1995. This program provided conditional transfers to 865 “national impoverished counties,” with the major focus to improve school facilities. However, it did not change the financing structure of the decentralization system, nor did it relieve the financial burden on rural areas other than the national impoverished counties. The regional disparity in government education expenditure continued to grow between 1995 and 2000. The ratio of government expenditure per student between the highest and the lowest spending province rose to 10.7 and 6.7 for primary and junior high education, respectively, in 2000.

Another trigger for the reform of the decentralized financing system was rural tax reform, which began in 2000, and the introduction of exemptions from tuition fees for compulsory education, both of which made it much harder for grassroots governments to finance education from their own resources. The first stage of rural tax reform abolished the major revenue resources—educational surcharges and fundraising for education—that had enabled townships and villages to finance education. As a result, the responsibility for financing rural compulsory education was shifted from townships and villages to counties. This may help reduce within-county disparities in educational development, particularly the rural-urban gap, because the entire county now shared resources. The second stage of rural tax reform in 2003 abolished agricultural taxes and related fees, which eroded a substantial share of counties’ revenue. The exemptions from tuition fees for compulsory education was initially provided for students from poor rural areas in 2005 and was extended to all rural students in 2007 and to urban students in 2008. This further reduced the financial resources available to fund education, adding urgency to reform the decentralized system.

The New mechanism to Guarantee Rural Compulsory Education Financing (the New mechanism), a major reform in compulsory education financing, was announced at the end of 2005 and implemented in 2006. The reform was launched in the less-developed western provinces in 2006 and expanded to the entire country in 2007. In the New mechanism, the central government clearly expressed its responsibility to finance compulsory education through the compulsory education transfer. Provincial governments were also required to take more responsibility to increase the equity of educational financing within each province by giving more transfers to poor regions. The policies have centered around the goal of “no children left behind,” that is, no children dropping out of school because of poverty.

Panel a of table 10.3 illustrates the financing responsibilities of the central government. To reach a guaranteed level of administrative expenditure per student and to compensate for revenues lost through the tuition fee exemption, the central government committed to pay 80 percent of the guaranteed level of administrative expenditure of the western provinces (the least developed areas), 60 percent of the guaranteed level of the central provinces, and none of the costs of most of the eastern provinces (although this was increased to 50 percent for 2016). The central government also helped to finance free textbooks and school infrastructure. However, the reform did not modify the central government’s lack of responsibility for financing personnel costs, which constitute over 60 percent of total compulsory education costs, mainly consisting of teachers’ salaries. Therefore, teachers’ salaries continued to be a heavy burden for local governments.

The details of the system have changed over time. For example, the standards for administrative expenditure per rural student have increased over time (see table 10.3, panel b). The amounts were set in each province by the provincial governments between 2006 and 2008. After 2009, the central government announced uniform standards, by region and by urban or rural school. In 2016, the central government unified the urban and rural standards and started to contribute 50 percent of the standard to the eastern provinces. The standard was unified nationwide in 2020. Depending on the area, the central government contributed 50 percent or 100 percent of the subsistence allowance for poor students after 2016. In 2019, China grouped provinces into five tiers rather than the traditional western, central, and eastern tiers, with the level of the central government’s financing responsibility differing among the tiers.

The national standard for administrative expenditure is a minimum requirement. Each level of government is free to set its own standard as long as it is no lower than the level set by upper-level governments. Upper-level governments usually do not help finance anything at a level higher than their own standards. In practice, local standards vary substantially. For example, in 2016, the highest levels were in Shanghai (at ¥ 1,600 for primary education and ¥ 1,800 for junior high education), which were much higher than the national levels (at ¥ 650 for primary and ¥ 850 for junior high). A higher local standard means that the local government must bear a larger share of administrative expenditure, which may leave less money available for other educational expenses, such as personnel costs. Therefore, it is likely that the New mechanism increased the share of administrative expenditure in total government education expenditure.

The aim of the transfer system was to help poor regions, and the role of the central government in financing education in rich regions did not change much. In general, the New mechanism increased the financing responsibility of local