Chapter 4. Planning the use of school funding1

Formulating priorities and objectives

Effectively using education objectives to inform spending decisions depends on a shared understanding of educational quality and priorities to guide the budgeting process as well as the development of targets and reference standards against which its effectiveness can be assessed. Particularly in school systems with decentralised resource management responsibilities, the definition of well-defined and prioritised goals that can be translated into concrete targets at the local and school level has been central to guiding educational reforms (Nusche et al., 2016a). Box 4.1 provides an example from Denmark, showcasing the formulation of education priorities as a means to support the reform process in a decentralised budgeting system.

Many countries face challenges in establishing a shared understanding of educational quality that is suited to inform the planning of efficient resource use. In some countries, the use of idiosyncratic criteria, conflicting definitions or a failure to raise awareness of existing standards among all actors of the education system has created a lack of agreement over standards for educational quality. In Lithuania, for example, school and local level planning and evaluation are largely guided by idiosyncratic criteria, although the central level provides a framework for external school evaluation that sets out a detailed list of quality standards and 67 corresponding indicators (Shewbridge et al., 2016a). Likewise, not all countries set target dates for the completion of their educational objectives as part of planning process, which results in the absence of clear timeframes that could be used to subsequently evaluate spending decisions (Santiago et al., forthcoming).

Connecting spending decisions to targets and priorities

Education targets and priorities can be used to inform different stages of the budgeting process across administrative levels to ensure that the use of resources is aligned with educational objectives. An increasing number of OECD countries are making use of strategic documents to inform budget planning procedures and connect spending decisions to policy priorities. Developing these linkages between budget and strategy frameworks can provide governments with a clearer picture of where public finances are spent, facilitate the allocation of resources according to policy priorities and make it easier to track spending against the achievement of policy outcomes, particularly where targets and priorities are formulated in concrete terms (IIEP-UNESCO, 2010).

Although countries increasingly integrate annual budgets into strategically oriented medium-term expenditure frameworks (MTEFs), not all MTEFs are guided by concrete targets and priorities. For example, the five-year education budgets used in Uruguay were weakly linked to medium- and long-term strategic goals until annual targets and corresponding indicators were introduced with the most recent 2015-19 Budget Plan (Santiago et al., 2016b). Austria is another country that has taken significant steps to strengthen the link between spending decisions, performance and policy priorities by moving towards a performance-oriented budgeting approach at the national level. Building on a comprehensive reform launched in 2009, Austria introduced new budgeting principles in 2013 which led to the inclusion of performance targets in the federal budget alongside concrete actions envisaged to achieve these targets and criteria used to measure their success. The two education-related goals included in the 2015 budget are to improve gender equality in education and raise the level of education. Each goal is accompanied by three indicators whose progress is evaluated as part of the country’s monitoring framework for educational quality (Nusche et al., 2016b). The broad goals are then linked and referred back to by specific budget programmes such as the one for “compulsory schooling – primary and secondary level” (Bruneforth et al., forthcoming).

However, even where performance- or outcome-oriented budgeting norms are followed at the national level, they are not always adopted at sub-central levels of administration. Some countries therefore mandate all levels of the education system from the central to the school level to develop their budgets and justify their spending decisions in light of a shared set of priorities. This may involve drafting their own medium- and short-term strategic plans and budgets in line with the central level expenditure framework or at least actively contributing to the preparation of local expenditure frameworks prepared at the central level. Estonia provides an example where co-ordination within and between ministries and different levels of administration are used to promote widespread awareness and understanding of the country’s education goals and their effective integration into the budgeting process (see Box 4.2). However, in many countries, insufficient technical capacity at both the central and local levels constitutes a challenge when involving sub-central authorities in the implementation of strategic budgeting plans (IIEP-UNESCO, 2010).

Kazakhstan provides an example for strategically informed budgeting in a highly centralised planning system driven by an extensive system of norms which ensure that decisions issued at the central level filter down to local and school authorities. Strategic documents guiding the short-, medium- and long-term strategy contain specific indicators and targets which are translated into local implementation plans by intermediate authorities and regularly monitored for progress (OECD/The World Bank, 2015). Centralised top-down approaches provide clear expectations and priorities, ensure policy continuity and facilitate the monitoring of progress towards policy goals. On the other hand, limited spending discretion at the local level and a lack of consultation with stakeholders in the budgeting process will constrain the ability of school and local authorities to employ the mix of inputs deemed most appropriate to meet their local needs and efficiently deliver quality education. The engagement of a broad set of stakeholders and opportunities for participation are key to facilitating meaningful exchange, designing long term reforms and ensuring that education strategies adequately reflect resource needs across geographic and administrative areas of the system.

Developing local capacity and providing support for strategic budgeting

Decentralising resource management responsibility and involving schools or local authorities in the implementation of strategic budgeting frameworks requires capacity at both the central and local level. While school and sub-system authorities require technical skills to prepare and monitor plans, the central level requires the capacity to oversee and provide effective guidance for the decentralised planning process (IIEP-UNESCO, 2010). Particularly smaller communities often lack the training or resources to engage in strategic budget planning. Making budgetary autonomy work may therefore require an investment in local administrative personnel as well as effective self-evaluation and accountability mechanisms (see Chapters 2and 5). In some of the OECD review countries where schools bear significant responsibilities for the management of financial resources, like the Czech Republic, Estonia and the Slovak Republic, schools or school owners employ specialised administrative staff such as accountants and budget officers (Santiago et al., 2016a; Santiago et al., 2016b; Shewbridge et al., 2016b). Strengthening the capacity for effective budgeting at the sub-central level may also require training on financial resource management and goal-oriented budgeting to be integrated into professional development strategies for local and school-level leaders.

At the same time, even in systems with extensive local budgeting autonomy, the national or regional level can play an important role, not only in planning, triggering and steering education reform with a longer term systemic vision, but also in assisting local actors in the planning of their budget. Central education authorities can develop guidelines to assist with school finance and management procedures, provide feedback on the progress towards education goals, and co-ordinate the co-operation of actors across education levels for a whole-of-system approach to budgeting (Burns and Cerna, 2016). Several countries have also developed central consulting and advisory services that act as knowledge brokers, offering their services to schools and supporting them in making strategic spending choices. Box 4.3 describes how such forms of vertical and horizontal co‐operation support local actors in Denmark in assuming their responsibility for strategic budgeting. The centralised provision of electronic budgeting platforms and the supply of relevant data through central information management systems can be another way for the central government to support schools and local authorities in their budget planning activities, as illustrated in Box 4.3 (OECD, 2013c).

Strategic employment of evaluation results, value-for-money analyses and spending reviews

Evaluation results can be used to inform decisions throughout the budgeting cycle and serve as a basis for professional discussions among stakeholders concerning future reform initiatives. According to an OECD survey, approximately half of OECD countries reported the use of policy, programme or project evaluation results during budget negotiations between line ministries and the ministry of finance in 2005 (Curristine, 2005). Even more often than for the budget formulation itself, evaluation activities are commissioned and used internally by line ministries or national audit offices to inform their strategies and targets (Curristine, 2005). Not all evaluation activities explicitly assess the impact of programmes or policies relative to a set of previously established objectives. This can diminish their potential to help ministries in making spending decisions, prioritising among programmes and influencing their design or operation (Santiago et al., forthcoming).

Two evaluation techniques that explicitly aim to support effective spending decisions in the planning of educational resources are cost-benefit analysis and cost-efficiency analysis. Both constitute value-for-money analyses that weigh the expected or observed benefits of education programmes, policies or investments against the costs of their implementation in order to ensure the efficient and effective use of resources and increase the transparency of budgeting decisions. Cost-benefit analysis and cost-efficiency analysis can take a variety of forms and be employed ex ante to compare the anticipated consequences of alternative spending proposals or ex post, as a means to evaluate the impact of programmes and policies after their implementation (Fakharzadeh, 2016). Both cost-benefit analysis and cost-efficiency analysis procedures can, under certain circumstances, provide spending authorities with valuable information to inform budget planning procedures, help them choose between projects and policy options, determine the scale and timing of investments and decide on the expansion or continuation of existing projects.

While cost-efficiency analysis takes a particular outcome or target as its starting point and compares the relative cost of different ways to achieve it, cost-benefit analysis aims to provide a holistic comparison of policy options, taking into account all of their associated costs and outcomes by expressing both inputs and benefits in explicit monetary terms. In most OECD countries, these types of analyses are used primarily to evaluate system-level investments in capital projects, with 17 of 32 countries reporting to use some type of value-for-money analysis in the evaluation of all capital investments, another 11 countries using it for capital projects that exceed a certain cost and 9 employing it on an ad hoc basis (OECD, 2014). Cost-benefit and cost-efficiency analyses are less consistently used to inform the budgeting process for other types of education expenditure. Given the difficulties involved in translating the benefits of education programmes (from social mobility and reduced dropout rates to better employment prospects) into monetary values (see Chapter 1), cost-benefit analyses in particular are less frequently used in the education sector than they are in other policy areas (Münich and Psacharopoulos, 2014).

In light of the uncertainty and complexities involved in value-for-money analyses, most decision makers use them to complement, rather than substitute for other sources of information during the budgeting procedure, acknowledging their limitations and underlying assumptions (Münich and Psacharopoulos, 2014). Although the scope to perform rigorous cost-benefit analysis and cost-efficiency analysis in the education sector may be restricted by data limitations and other constraints, elaborating frameworks for value-for-money evaluations alone can help stakeholders develop a clearer idea of the costs and benefits associated with specific proposals, which stakeholders they might accrue to over time and whether any side effects or unintended consequences should be taken into consideration (Münich and Psacharopoulos, 2014).

Since the financial crisis in 2008 and the increased fiscal consolidation pressures that followed, spending reviews have gained importance as another tool to implement strategic savings through the budgeting process, offering a procedure for “developing and adopting savings measures, based on the systematic scrutiny of baseline expenditure” (Robinson, 2014). Rather than evaluating new policies and expenditure proposals, spending reviews are primarily designed to identify potential areas for savings in existing budget lines and recurrent expenditure, either through improved efficiency or reductions in services and transfer payments. Spending reviews may be conducted with a pre-defined savings target, as a means to set MTEFs or to define sectoral expenditure ceilings during the budget preparation. The nature of the reviews varies considerably across countries with regards to their scope, frequency, and the types of saving measures they propose. Yet in 2012, half of the surveyed OECD countries reported to be engaged in a review process and most of these opted for a comprehensive format, identifying saving measures across a wide range of governmental expenditures (Robinson, 2014).

Spending reviews in OECD countries are usually initiated and designed by the finance ministries and political leaders who decide on the review’s scope, timeframe and saving targets. Depending on country-specific factors, such as the composition of review teams, education ministries often play a central role when it comes to developing the final set of savings options to be proposed for implementation (Fakharzadeh, 2016). In order to identify areas for efficiency improvements, review teams rely on high-quality information generated through their own evaluation activities or drawn from existing data on educational efficiency. Routinely carrying out evaluation activities can therefore make an important contribution to the quality of spending reviews if their results are relevant, reliable and effectively integrated into the process (Robinson, 2014).

While spending reviews have traditionally been used by countries on an ad hoc basis, they are increasingly integrated into budget preparation processes (Fakharzadeh, 2016). This implies co-ordinating the frequency and timing of spending reviews with that of the country’s ministerial budget allocations. In some cases, reviews are also timed so as to ensure that concrete saving options can be presented to the political leadership alongside the cost of newly proposed policy initiatives, which allows them to make a direct contribution to the budget planning process (Robinson, 2014). The simultaneous consideration of spending and saving options makes it possible for governments to adopt new high-priority spending proposals without increasing aggregate expenditure by implementing corresponding saving measures identified in the review process to balance their budget. This process encourages governments to engage in a direct comparison between the merits of new spending proposals and their baseline expenditure (Robinson, 2014).

Use of performance information in the budgeting process

Although there has been a general trend towards a greater emphasis on output criteria and performance information in the budget preparation and planning process (see Chapter 1), there is no consensus on the optimal use of performance data and the way it is employed to inform spending decisions varies considerably across systems (OECD, 2014). Broadly conceived, performance budgeting implies using information on what spending agencies are expected to accomplish with the resources they are allocated. As described above, this approach can entail the specification of measurable objectives and performance indicators for government programmes, the inclusion of targets and expected outcomes alongside expenditure information in budget documents as well as measuring, reporting and evaluating the results of government expenditure and using this information for strategic planning and budgeting (de Jong et al., 2013). Even among countries that routinely integrate performance targets into their budget documents, the use of performance information as a basis to decide future spending allocations is less frequent and often limited.

The information used for performance budgeting purposes can originate from multiple sources and take a variety of forms including operation and performance reports generated through regular evaluation practices, findings from spending reviews as well as various indicators pertaining to resource inputs, outputs and efficiency (Fakharzadeh, 2016; OECD, 2014). The means by which performance data influences spending decisions varies, ranging from its merely presentational use to direct links between performance measures and resource allocation (Curristine, 2005). Most commonly, the link is indirect and performance data serves as one of multiple types of information which decision makers consult for planning and allocation purposes. In theory, performance-based planning and allocation procedures can be used at different levels of the education system and at various points during the budgeting process.

Developing capacity for the use of data and research evidence across the system

Many OECD countries lack effective mechanisms to strategically integrate data and educational research into the process of evidence-based resource planning (OECD, 2007; Santiago et al., 2016b). Cross-country research indicates that systematic weaknesses in the ability to use data and research evidence can appear at every level of governance (Burns and Cerna, 2016). As many systems devolve planning and budgeting powers to sub-central authorities, some have taken active measures to synthesise research evidence and feed the results back into the system to support principals and local actors in assuming these new responsibilities effectively.

The effective integration of research evidence into the policy-making and budgeting processes can be facilitated by developing fora that bring together researchers and policy makers to share relevant research evidence and discuss its application, as well as institutions that assess the legitimacy and rigour of research evidence, build trust and increase the co-operation between the policy and research communities (OECD, 2007; Santiago et al., 2016b). This may involve strengthening the capacity and mandate of existing evaluation bodies to assume a more active role as knowledge brokers and tasking them with strategically consolidating evidence from across the system and disseminating it to support policy development and budgeting procedures (Santiago et al., 2016b).

Stages of the budgeting process

In the most general terms, the budgeting process can be described as a succession of five stages consisting of: i) the budget preparation; ii) its review and adoption; iii) the budget implementation and execution; iv) parliamentary control of the budget implementation and v) financial reporting and external audit (OECD, 2004). This chapter looks into the planning stages of the budget preparation, review and adoption while the monitoring and control of its implementation as well as reporting and external audits are discussed in Chapter 5. Although the budgeting process involves different administrative levels contributing to and sharing decision-making responsibilities at each of these stages, a central budgeting authority (CBA) is usually responsible for co-ordinating the budgeting process at the central level, providing its timeframe, procedural rules and guidelines. In most OECD countries, the CBA is also charged with overseeing the development and submission of the final budget and is located in the Ministry of Finance or Economy. Exceptions to this rule include Australia, Canada and Ireland, where authority over the budgeting process is shared between several government entities, the United States, where it is located in the President’s office and Belgium, where the CBA is part of the Federal Public Service Budget and Management Control (OECD, 2014).

Budget planning at the central government level

In most OECD countries, the ministry of finance establishes the procedural framework for the budgeting process in a budget circular which it provides to line ministries. The budget circular outlines the rules and timeline for the different budgeting procedures. In addition, it may provide guidelines for the use of fiscal projections, contain expenditure ceilings or targets and inform education ministries of specific government priorities. Throughout the budgeting process, the actors involved may draw on a wide range of information, consultation procedures and planning tools to guarantee that education budgets meet future resource needs.

In countries where the ministry of finance sets budget ceilings before line ministries draft their budget proposals, it may take into account factors such as fiscal targets for the aggregate budget, economic forecasts, past expenditure levels and policy priorities. In countries using bottom-up budgeting procedures, ministerial budget proposals tend to be more expenditure-driven, placing less emphasis on overall economic forecasts or system-wide policy priorities. In either case, some finance ministries offer education ministries their horizontal support during the budget preparation, providing them with procedural guidance as well as relevant financial and accounting documents (Curristine, 2005). Most education ministries also have a dedicated unit that is tasked with budgetary and funding matters, such as the Office of Information and Financial Affairs situated in the Icelandic Department of Education or the Finance Department within the Lithuanian Ministry of Education and Science (Fakharzadeh, 2016). These organisational units can play an important role in setting up budgeting and accounting systems and often take a lead in negotiating education budgets with the finance ministry.

Countries draw on a wide range of information during the central-level preparation of the education budget. Among OECD review countries, all 15 education systems with such central-level planning procedures reported the use of administrative data (e.g. the number of students, teachers and schools). Ten of them also made use of demographic information, such as population projections. Macroeconomic and fiscal forecasts (e.g. the GDP growth rate or the education expenditure’s share of the national budget) as well as data on student flows (e.g. dropout or transition rates across education levels) are less common and used to prepare central education budgets in 8 and 5 out of the 15 systems respectively. Eight countries reported to make use of historical allocation techniques by drawing on previous years’ budget data and systems frequently consider qualitative information such as policy priorities included in strategic documents (12 of 15) and identified needs (9 of 15) when planning their education budgets. In addition, some countries consult the results of programme and policy impact evaluations (Chile, Estonia, Kazakhstan and Spain) or performance data, for example Estonia, where the success relative to national education targets is taken into account during the budget planning process (see Table 4.A1.1). Not all countries have a systematic approach to the way this information is brought to bear on the budget planning process and the relative emphasis placed on different types of data during the formulation of initial spending ceilings, budget proposals and the subsequent negotiations may vary considerably, not least in light of the often highly politicised context in which budget negotiations take place.

The main types of education expenditure pertain to staffing, operating and infrastructure costs. Given the distinct characteristics of capital investment projects and current expenditure, 20 of 33 surveyed OECD countries used separate system-level budgets for capital and operating expenditures in 2012 (up from 15 countries in 2007). Even though some systems use “integrated budgets” covering both current and investment spending, they might still be separately accounted for before they are merged for allocation purposes (OECD, 2014). The planning tools employed in the budgeting process may vary across different expenditure types accordingly.

Particularly the planning and execution of spending on multi-year capital projects involves distinct budgeting procedures in many OECD countries. More frequently than is the case for operating expenses, decisions on the funding of capital projects are accompanied by ex ante value-for-money assessments. Nearly half of OECD countries reported funding the entire cost for capital projects up-front, while another 12 countries provided spending agencies with their capital funding appropriations incrementally over the course of multiple years. The remaining countries, including Austria, the Slovak Republic and the United Kingdom, determined the appropriate funding procedure on a case by case basis (OECD, 2014). In many countries, investment expenditure is also subject to distinct regulations concerning the carry-over of unspent appropriations across budgetary years and the permissibility for ministries to borrow against future appropriations.

Budget planning at sub-central levels

Given the trend towards decentralisation in many OECD countries, the relationships between central governments, ministries, regional and local actors as well as their respective responsibilities in the education budgeting process have been subject to change with local authorities increasingly involved in resource planning. As discussed in Chapter 2, although local actors may enjoy greater allocation and budgeting responsibilities for funds raised at their level of administration, resource raising and budgeting power do not necessarily align and some countries provide regional and local authorities with considerable responsibility for administering central grants (see Chapter 2). Local and regional actors may thus be responsible for developing budget proposals that outline the use of financial resources or their further distribution among sub-central levels of administration and schools.

Not all decentralised systems issue prescriptions concerning the use of particular budgeting and accounting procedures at the sub-central level. In Denmark, for instance, each municipality is responsible for devising and implementing its own budget planning approach (Nusche et al., 2016a). Iceland provides another example, which is discussed in Box 4.5. In other cases, regulations and requirements for local budgeting procedures are inscribed in national legislation, Education Acts and other statues. Guidance and requirements may be communicated through different methods, such as budget circulars, budget laws, generally accepted accounting standards, charts of accounts, and budget classifications. Furthermore, ministries of education and their budget planning units or ministries of finance may provide intermediate authorities with guidelines concerning financial management in education as well as budgeting and accounting practices (Fakhazadeh, 2016).

Budget planning in schools

As discussed in Chapter 2, school-level authorities across countries enjoy varying degrees of autonomy in planning their budgets and allocating resources. While staff and operating expenditure are centrally controlled in countries such as Uruguay, others afford school directors extensive control over their budgets including the ability to hire and dismiss teachers or determine their salaries, as is the case in Estonia. Within countries, the discretion over resource allocation and budgeting responsibilities can also vary across school types, levels of education and types of resources.

In the case of Estonia, leaders of municipal schools submit their budget proposals to be approved by the municipal authorities, while the central education authority is responsible for approving state school budgets. School boards, which are typically composed of staff, parents, students and sometimes community representatives, play a more active role in the budget planning process of countries such as Lithuania, where they approve school budgets and often take part in budgeting decisions concerning the use of personal income tax revenues (Shewbridge et al., 2016a). By contrast, in highly centralised systems, actors at the school level may not have any direct involvement in budgeting procedures since budgets are drafted and managed directly from the central level. Similarly, the budgets of most public primary and secondary schools in Chile are managed by local level administrators and indirectly defined through funding allocations transferred from the central level.

In the Flemish Community of Belgium, school boards, which are responsible for the governance of one or multiple schools, enjoy a high degree of autonomy concerning their use of resources and are responsible for setting up their own budgeting and accounting systems in compliance with the rules and procedures of their educational network. In general, the school boards of public providers need to follow the same budgetary rules as any public service while private school boards enjoy more flexibility and in some cases only have to follow the budgeting rules that apply to private enterprises or foundations. However, given that private schools receive public funding, recent changes to EU legislation which also apply to other EU member countries have mandated private school boards to align some of their budgetary procedures with those of public services (Flemish Ministry of Education and Training, 2015).

In many countries where school leaders or school boards are responsible for planning their own budgets, the type of information they use in the process is at their discretion. It often involves a combination of identified resource needs, student flow and enrolment data. To facilitate strategic budget planning at the school level, some countries require school authorities to provide strategic development plans linking the school’s education objectives to proposed expenditures. Particularly if they are integrated into a wider multi-annual budget framework adopted at different levels of the system, school development plans can play an important role in facilitating a system-wide approach to educational resource planning.

Different horizontal and vertical support mechanisms can assist schools in their budget preparation. In Denmark, for example, school boards play a formal role in the approval of school budgets (Nusche et al., 2016a). In Estonia, school boards exercise an advisory function in the preparation of school budgets and some municipalities have developed remote electronic accounting systems which relieve schools of the cost of keeping their own accounts (Santiago et al., 2016b). Giving school leaders greater responsibility during the budget development and planning process can promote their ownership of the budget and enhance their ability to use their operational knowledge of the local context to efficiently and effectively respond to local challenges and needs. Enabling them to adequately perform this task requires a commitment to developing capacity at the school and local levels, which will be further discussed below.

Multi-annual budgeting frameworks

Over the past decades, a growing number of OECD countries have adopted medium-term expenditure frameworks (MTEFs) to carry out the budgeting process with a multi-year perspective. Budgeting based on MTEFs typically involves setting expenditure ceilings for a period of three to five years, rather than issuing them on an exclusive year-by-year basis. The ceilings prescribe limits of varying detail pertaining to aggregate and ministerial spending or, less frequently, expenditure levels for specific policy areas and line items. An expenditure framework can be updated on a rolling basis (as in Austria, Germany and Sweden) by adding a new ceiling to the end of the framework period each year. Alternatively, MTEFs can be updated periodically (as in France, the United Kingdom and Uruguay), which involves drawing up a new multi-annual sequence of ceilings once a certain number of years has passed or a new cabinet period started. The individual ceilings of a multi-year framework may be fixed or subject to regular adjustments and MTEFs with budget ceilings of any kind may be complemented by “descriptive forward estimates” of government expenditure and revenue levels under different economic or policy scenarios (OECD, 2014).

By 2012, 29 of 33 surveyed OECD countries reported the use medium-term expenditure frameworks which, in most cases, need to be approved either by the cabinet office or parliament before coming into force. Countries exhibit significant variation in the legal basis and authority of MTEFs, the compliance mechanisms used to enforce their budget ceilings, the entities charged with monitoring their execution and whether the respective decision-making powers rest with the legislature or the executive (OECD, 2014). In addition, countries have taken different approaches to balancing predictability and flexibility in their multi-annual budget frameworks. Most countries, such as the Czech Republic, treat budget ceilings beyond the first year of the multi-annual framework as indicative and allow for regular revisions of the ceilings to account for unforeseen events or unexpected fiscal developments such as significant deviations from inflation targets, although a variety of restrictions and procedural hurdles may apply. Other countries, such as the United Kingdom, provide fixed ceilings for each year of the multi-annual budget, which requires forward estimates of particularly high quality to ensure the ceilings’ medium-term credibility (Robinson, 2013). MTEFs also afford varying degrees of flexibility for ministries to reallocate funding between years or organisational units and while some MTEFs only provide aggregate expenditure ceilings at the central level, other countries formulate them for ministries, agencies and individual programmes (OECD, 2014). Box 4.6 provides an example of system-level multi-annual budgeting practices in Uruguay.

Many countries face challenges in establishing a shared understanding of educational quality that is suited to inform the planning of efficient resource use. In some countries, the use of idiosyncratic criteria, conflicting definitions or a failure to raise awareness of existing standards among all actors of the education system has created a lack of agreement over standards for educational quality. In Lithuania, for example, school and local level planning and evaluation are largely guided by idiosyncratic criteria, although the central level provides a framework for external school evaluation that sets out a detailed list of quality standards and 67 corresponding indicators (Shewbridge et al., 2016a). Likewise, not all countries set target dates for the completion of their educational objectives as part of planning process, which results in the absence of clear timeframes that could be used to subsequently evaluate spending decisions (Santiago et al., forthcoming).

Multi-annual medium-term expenditure frameworks can guide budget planning procedures at different levels of the education system. Among the OECD review countries, 5 out of 17 reported to use multiannual education budgets at the central level, namely Austria and Slovenia, which operate a 2-year budget, Iceland and Kazakhstan, which use 3‐year budgets and Uruguay, which uses a 5-year budget. In Estonia, while the central budget is annual, it is linked to four-year MTEFs. Some countries require spending authorities at the state, regional or local levels to formulate their budget proposals in line with the time-frame adopted at the central level (e.g. in Estonia, Iceland and Slovenia). This serves to increase the local capacity for strategic budgeting, co-ordinate budgeting procedures and ensure that all levels of the system actively contribute to central targets and priorities.

In some systems, as mentioned above, even schools are encouraged to prepare multi-annual budgets or development plans in accordance with the multi-annual perspective adopted at higher levels of administration. This can help local actors in making strategic spending decisions and provide an additional source of accountability, complementing the schools’ annual financial reports with tangible objectives against which their progress can be assessed. While some countries apply a multi-annual budgeting approach across all levels of the education system, Estonia uses multi-annual budgets at the local level and annual budgeting procedures at the central levels, linking both to four-year medium-term expenditure frameworks. By contrast, countries including the Slovak Republic and Lithuania rely on single-year budgets at all levels of the education system, and Sweden gives municipalities discretion over the time period covered by their school budgets (see Table 4.A1.2).

MTEFs are widely acknowledged as an effective tool to assist strategic budget planning. They help ministries of finance and education ministries alike to maintain fiscal discipline by ensuring that policy proposals and programmes are backed by a medium-term budget and that varying costs at different stages of their implementation are adequately accounted for. In addition, MTEFs can give spending agencies the necessary resource security to strategically plan their operations and assist stakeholders in identifying the trade-offs and spending choices they need to make in order to adapt to future levels of funding. Adopting a multi-annual budgeting perspective can be particularly helpful when developing implementation plans for large capital projects whose operating costs are expected to change over time or reform projects whose fiscal impact is not immediately apparent due to their late implementation in the budget year (OECD, 2014).

Fiscal rules and control mechanisms

Rules and control mechanisms pertaining to expenditure and revenue, deficits or debt accumulation play a role in the budgeting process of nearly all OECD countries. Designed to ensure long-term fiscal sustainability, they impose constraints on the spending decisions of executives, ministries, legislatures or local authorities and specify potential sanctions in the case of their violation. Fiscal rules can derive their authority from different sources, including national legislation, executive commitments, constitutionally guaranteed instruments or international treaties. Practices regarding fiscal rules vary widely across national contexts and the policy goals they serve to support. Their effectiveness depends not only on a clear and transparent design, but also their integration with other budgeting practices and procedures including MTEFs, fiscal projections, effective monitoring and enforcement mechanisms (Schick, 2003).

An important development contributing to the increased use of fiscal rules among OECD countries has been the European Stability and Growth Pact, which limits the budget deficit European Union member states are allowed to run at 3% of GDP and their gross national debt at 60% of GDP. In addition, the Pact mandates the development of convergence or stability programmes that outline the countries’ strategy to meet medium-term budgetary objectives. Since the Treaty on Stability, Co-ordination and Governance in the EU (the Fiscal Compact) came into force in 2013, members of the Eurozone have also had to adopt fiscal rules for a balanced budget into their national legislation (OECD, 2014).

An example of budgeting rules established in the aftermath of the financial crisis and in response to the European Stability and Growth Pact is the Budget Law passed in Denmark in 2012, which institutionalised a sanctioning mechanism that had been effective since 2010. Following negative GDP growth in 2009 and a significant budget overrun among Danish municipalities, the government introduced a sanctioning regime the following year which took effect in 2011. The Budget Law introduced binding multi-annual expenditure ceilings at the central, regional and municipal levels as well as an automatic sanction mechanism. In case municipalities fail to remain below the annually determined aggregate expenditure ceiling, significant sanctions are imposed and deduced partly from the grants of overspending municipalities (60%) and all other municipalities collectively (40%). Between 2011 and 2013, in the years following the Budget Law’s introduction, municipalities reduced their expenditure and consistently underran their budgets (Houlberg et al., 2016; Nusche et al., 2016a).

Forecasting long-term and short-term resource needs

Strategic thinking and long-term planning are central to the successful governance of complex education systems (Burns, Köster and Fuster, 2016). Forecasts and projections of future resource needs can be used by different entities throughout the stages of the budgeting process to support this objective, to ensure the education system’s long-term fiscal sustainability and develop clear implementation paths for educational reforms. In 2012, 24 of 33 OECD countries participating in the OECD Budget Practices and Procedures Survey, employed long-term fiscal projections covering more than ten years to inform the budgeting process at the central level. The simulation models used for these prognoses tend to be provided by the CBA, other core ministries or by government-independent institutions (OECD, 2014). Long-term fiscal projections need to be regularly revised, which tends to occur in regular annual or multi-annual intervals or following elections. Around half of OECD countries require their annual budgets or medium-term expenditure frameworks to be consistent with these projections (OECD, 2014).

Typically, the ministry of finance will use prognoses and forecasts to establish expenditure ceilings for line ministries, while the education ministry may use them to prepare and justify its expenditure requests during the budget negotiations. Some intermediate and school level authorities also use forecasting tools to estimate their future expenditure, prepare budgets and allocate resources. Forecasts and simulations can also be employed as a strategic planning tool to estimate revenues and expenditure under different scenarios. The Norwegian Ministry of Finance, for example, requires the education ministry to provide a baseline expenditure projection assuming no policy change along with its policy proposals. These scenarios then form the basis for political discussions on ministerial revenue and expenditure limits as well as the resources available for new policy initiatives (Anderson, Curristine and Merk, 2006). Forecasting resource needs in the education sector involves anticipating developments in the demand for services across different education levels and sectors as well as their implications for human, pedagogical, physical and financial resource needs. The precise methodologies used to estimate expenditure are not always publicly available and vary across countries as well as authorities within countries. At the central level, baseline data on demographic changes in the school-age population and information on previous budget allocations may be combined with additional parameters of varying complexity, for example projected enrolment rates and student flows, different modalities of resource utilisation and macroeconomic or budgetary indicators (Chang and Radi, 2001). Forecasting models can be purely extrapolative or take into account policy changes and normative targets (Fakharzadeh, 2016). At the school-level, the use of these tools tends to be at the discretion of school boards and school leaders.

The effective prediction of resource needs across education levels often requires both vertical and horizontal collaboration and the mobilisation of data from various sources within the education system. In Spain, for example, schools are requested to provide the respective education authorities with admission forecasts to inform the annual allocation of funding. This data is then used to guide subsequent resource planning and management activities. In addition, enrolment levels in pre-school services as well as data from municipal registers are used to inform demographic projections in co-ordination with local and regional authorities (INEE, 2016). In some cases, planning the budget for vocational education and training (VET) can also be supported by efforts to predict labour market trends and the demand for skills in different industries by employing systematic forecasts or consulting employers and unions. For example, Estonia’s Qualification Authority has developed and implemented a system that seeks to provide the Ministry of Education and Research with ten-year labour market and skills forecasts on an annual basis to inform the planning of VET resources (Santiago et al., 2016a).

Budgeting techniques and structures

The structure of education budgets and the corresponding procedures for their planning, negotiation and execution differ considerably across countries. One way to distinguish between different budget structures is the extent to which they allocate expenditure to line items or programmes – a distinction that tends to correspond with a budget’s orientation towards inputs or outputs respectively. Both techniques can in theory be adopted for budgeting procedures from the central to the school level and there are a variety of hybrid approaches that combine elements of line item and programme budgeting. Some countries use line item classifications alongside programme-based methods for different purposes during the budgeting process, sometimes distinguishing between the classifications used to allocate resources and the way budget information is presented to policy makers and stakeholders. In the United States, for example, funding is usually allocated to schools on the basis of line items while programme budgeting is used for planning purposes (NCES, 2003).

Budget flexibility and incentives for efficiency

Relaxing central input controls and increasing budget flexibility has been a common strategy to enable education authorities to pursue their objectives more efficiently and effectively. Measures to increase flexibility have been applied at the level of the executive, education ministries, local administrations and schools. More flexibility in the budget planning and execution process can serve to increase its responsiveness to unforeseen circumstances and changing priorities as well as providing incentives for the more efficient use of school funding at the planning stage.

Adopt a multi-annual approach to budget planning

Adopting a multi-annual approach to planning education expenditure and making effective use of budgeting tools such as medium-term expenditure frameworks (MTEFs) is key to ensuring the efficiency and financial sustainability of high-performing education systems. MTEFs constitute a strong framework to combine medium-term economic and fiscal estimates with projected resource needs in order to assist spending authorities in making informed and sustainable budgeting choices. In order to achieve and maintain fiscal discipline, multi-annual expenditure plans should be adopted with a view to ensure that policy proposals and programmes are backed by a medium-term budget and that varying costs at different stages of their implementation are adequately accounted for.

Adopting a multi-annual budgeting process can provide spending agencies with a means to strategically plan their operations, take into account potential trade-offs between alternative spending options and their longer-term expenditure implications, thus giving them additional security when planning longer-term investments. The development of multi-annual budgets should be guided by high-quality forecasting mechanisms to ensure the reliability of indicative spending ceilings or create the conditions necessary to commit to longer-term allocations. In order to maximise their value for strategic planning, MTEFs should integrate budgeting processes at different levels of the education system by encouraging actors across administrative levels to align their spending proposals with central expenditure frameworks.

Strategically link spending decisions to policy priorities

Aligning funding strategies with policy objectives is crucial to ensure that financial resources are effectively employed to drive educational improvement and reforms. This requires both the formulation of clear goals and their connection to the budget planning process. Central-level educational goals should be well-defined and prioritised and – particularly in school systems with decentralised resource planning responsibilities – translatable into concrete objectives at the sub-central level. Fostering widespread awareness and a shared understanding of this strategic vision for education among different stakeholder groups and levels of authority can increase the coherence of budget planning activities across the education system. In addition, it would be beneficial for planning purposes if educational objectives were accompanied by a range of targets with a defined time horizon to promote accountability, increase their value for strategic resource planning and facilitate the subsequent evaluation of spending decisions.

Countries should ensure that these targets and policy priorities are taken into consideration when planning the use of school funding by integrating them into strategic documents and the procedural mechanisms that guide the budget preparation at different levels of the education system. Particularly when combined with multi-annual budgeting procedures, strategic frameworks containing short- and medium-term objectives should be used to inform negotiations and decisions on medium-term expenditure frameworks. Information on policy objectives and expected outcomes should also be presented alongside budget allocations in order to facilitate the distribution of resources according to policy priorities, provide authorities with a clear picture of the purposes that expenditures serve and facilitate the subsequent evaluation of spending decisions against the achievement of policy outcomes. Countries should seek to establish these links between strategic objectives and educational expenditure beyond the central level, for example by encouraging the alignment of spending decisions with school development plans. This may require a commitment to building technical and strategic capacity where local actors and school authorities play an active role in the budgeting process.

Strategically use evaluation and research evidence in the budgeting process

The effective planning of educational resource use relies on the systematic mobilisation of evidence generated through research, evaluations and monitoring activities. Evidence on the efficiency of spending decisions should be used to inform discussions among stakeholders and help the responsible authorities in making informed decisions throughout the budget preparation process. To effectively inform evidence-based budget planning, the data generated by evaluation activities should explicitly assess the impact of programmes and policy initiatives, ideally relating it to previously established objectives and expenditure information. If they are well co-ordinated with the budgeting process, spending reviews can prove another important source of information to support efficient spending choices. To this end, the timing and frequency of spending reviews should be aligned with the central-level budget planning procedures to ensure that concrete saving options are identified and presented to the political leadership at a time when they can be considered alongside the cost of newly proposed policy initiatives.

Education systems should also promote the creation of fora that foster co-operation between researchers and policy makers as well as institutions that can act as knowledge brokers and strategically consolidate, evaluate and disseminate evidence to facilitate its integration into the budgeting processes. Particularly in decentralised systems, school principals and local authorities should be encouraged and enabled to use data and research evidence for budgeting purposes through training as well as vertical and horizontal support. It is important to ensure that stakeholder groups can contribute to discussions regarding the design of evaluations, the evidence collected and the interpretation of evaluation outcomes.

Provide sufficient budget flexibility and incentives for efficiency

Introducing an appropriate degree of flexibility into the budgeting process can improve its responsiveness to unforeseen circumstances and promote more efficient spending decisions at the sub-central level. Particularly in the context of multi-annual budgeting procedures, countries should seek to reconcile the importance of long-term reliability and stability in funding allocations with their responsiveness to changing conditions in the short term. Allowing for the regular adjustment of multi-annual budget ceilings to take into account changing resource forecasts and permitting funding to be shifted across budget items in response to emergencies or reassessed priorities can significantly improve the allocation of educational resources if appropriately regulated. Schools and local authorities should also be provided with some room to carry unused appropriations forward from one budget year to the next. This can discourage inefficient expenditures towards the end of the budget cycle and provide schools and local authorities with incentives to mobilise additional revenue or improve the efficiency of their operations, although appropriate regulations should prevent the accumulation of excessive surpluses and spending fluctuations across years.