Indicator D6. How are public funds allocated to schools?

In this indicator, five distinct levels of government or education authority at which decisions on the funding of schools (or the most local level of governance) can be taken are distinguished: central, state, provincial or regional, sub-regional or inter-municipal, and local levels (see Definitions section). However, for the purpose of describing funding frameworks for primary and lower secondary educational institutions and to ease the comparison between federal countries and non-federal ones, the levels of decision making are grouped into three categories: central or state governments, provincial/regional or sub-regional/inter-municipal authorities or governments, and local authorities or governments.

Not all levels of decision making exist in all countries, and where they do exist, they are not necessarily involved in decisions about school funding. In some cases, the levels of government involved in decision making also vary according to the level of education and/or programme orientation. Five distinct groups of countries can be identified based on the number of levels of government involved in decision making and the level(s) that directly fund (i.e. after transfers) expenditure on educational institutions.

In a small group of four countries (Austria, Ireland, the Netherlands and Turkey), a single level of government (the central level) takes decisions on the funding of schools (or lowest level of governance). In Lithuania, this framework applies to lower secondary vocational programmes only, whereas in Ireland and the Netherlands it applies to both primary and lower secondary level.

In the majority of countries, decisions related to the allocation and/or distribution of funds are taken at two levels. Among these countries, the highest level transfers funds to the lowest level of governance involved, which takes decisions on all categories of expenditure (Australia, Chile, Denmark, Estonia, Finland, Hungary, Korea, Latvia, Lithuania [primary and lower secondary general programmes], Norway, the Russian Federation [lower secondary vocational programmes], Sweden and Turkey), whereas the decisions on funding are shared between these two levels of government in a smaller number of countries and economies (England [United Kingdom], France [primary and lower secondary general programmes], Israel, Mexico, Slovenia, Spain [lower secondary] and Switzerland).

In the remaining countries and economies, three levels of government are involved in decisions about school funding. In five countries (Austria, the Czech Republic, France [primary], Poland and the Russian Federation [primary and lower secondary general programmes]), funding is shared between two levels of government whereas funding is shared between all three levels in Brazil, Colombia, the French Community of Belgium, Germany, Japan, Spain (primary) and the United States.

Although countries can be grouped based on the levels of government involved in funding educational institutions, this does not imply any similarity in the bases used to allocate resources nor in the funding mechanisms used to distribute funding to schools (or the most local level of governance) in each of these groups. For example, in Finland and Turkey, funding flows from one level of government to a lower one, which then distributes funds between different categories of expenditure, but the autonomy of the lower level of government is much greater in Finland than in Turkey. In Finland, central government funding accounts for about 25% of total public expenditure on educational institutions. The allocation of funds to local authorities is based on formula funding and the local level then has complete autonomy to allocate funds to categories of expenditure. This contrasts with Turkey, where a combination of administrative discretion and incremental costs are used by the central government to allocate resources for current expenditure to provincial governments. The central government then distributes funding using a combination of restricted block grants, earmarked grants, school-specific grants and dedicated grants. This means that the provincial level in Turkey has less discretion in how funding is allocated and spent because of the restrictions and earmarks associated with the funding it receives (Table D6.1, Table D6.2 and Table D6.5, available on line).

The basis for the allocation of funds to educational institutions (or the most local level of government) refers to the way decisions are taken about the amount of funds to allocate to sub-central authorities or schools (or most local level of governance). Four main bases are used to various extents in countries: administrative discretion, incremental costs, bidding and bargaining, and formula funding (see Box D6.1 for definitions).

Countries do not tend to use one basis exclusively for allocating all funding; in many cases, they use two or more bases together. For example in Estonia, a combination of incremental costs (using previous expenditure per student) and formula funding (using student enrolment) is used to allocate funds for the various categories of expenditure related to educational institutions.

The bases used for funding and their prevalence also vary by type of expenditure. Among the 31 OECD and partner countries and economies with available information, formulas is the most commonly used basis for funding (particularly for teaching staff), compared to the other three bases to allocate current resources, while administrative discretion is the most commonly used basis to allocate funding for capital expenditure. Bidding and bargaining is not a common way of allocating funding for any type of expenditure (Figure D6.1).

Several bases are commonly used in combination with each other and the combinations used vary substantially between countries and economies (and there is no clear pattern that these combinations vary depending on the number of levels of government involved in the allocation of funds). Austria, England (United Kingdom), France, Slovenia, Spain and the United States reported all four bases being used in at least one category of expenditure. Only six countries reported only one basis being used; Mexico uses administrative discretion only, while Brazil, Finland, Israel, the Netherlands and Norway use funding formulas exclusively. All other countries and economies use some combination of two or three bases. Overall, it is very common for formula funding to be used in combination with administrative discretion. Seventeen countries and economies use these two bases together; four of these use this combination exclusively (the French Community of Belgium, Germany, Japan and Latvia).

The mechanism used to actually distribute funding is distinct from the basis used to allocate it (and there is no clear pattern that specific mechanisms are associated with specific basis used to allocate funds). There are five main mechanisms used: lump sum transfer, restricted block grant, earmarked grant, school-specific grant and dedicated grant (see Box D6.1 for definitions).

An analysis of funding mechanisms aims to understand how funds are actually transferred from one level of government to another, or from a level of government to a school (or lowest level of governance). It also sheds some light on the extent to which a specific level of government (or school) has autonomy in deciding how and on what categories of expenditure the funds should be spent.

Among the 31 OECD and partner countries and economies with available information, earmarked grants are the most commonly used mechanism: 26 countries and economies use them for at least one category of expenditure (Table D6.5, available on line). This implies, in many cases, that the level of government (or school) receiving this funding has limited discretion on the way these funds can be spent. However, there is considerable variation in the most commonly used mechanisms between categories of expenditure. For general funding, a similar number of countries distribute (at least some of) their funding as lump sums (i.e. allowing complete discretion) (13 countries and economies) and as earmarked grants (15 countries). For capital expenditure, school-specific grants are a fairly popular mechanism and are used by 11 countries and economies, but they are less likely to be used for dispersing funds for teaching (only in Hungary) and non-teaching staff (only in Hungary, Lithuania and Turkey).

Although earmarked grants are very common and are even the only mechanism used in Japan and the Russian Federation for all categories of expenditure, five countries do not use this mechanism in their funding system of educational institutions. Funding is distributed using a combination of restricted block grants and lump sums in Austraila, only lump sums in Finland and Norway, dedicated grants in Mexico, and restricted grants in Brazil.

In most cases, combinations of multiple funding mechanisms are used. Four countries use all five funding mechanisms, for at least one category of expenditure (Hungary, Ireland, Israel and the United States). The remaining 21 countries and economies use a combination of two, three or four funding mechanisms. There are no obvious patterns of combinations (other than the prevalence of earmarked grants) associated with specific categories of expenditure.

Funding formulas are the most commonly used basis for allocation among OECD and partner countries and economies. Most use funding formulas to some extent. Among the 31 countries and economies for which data are available, only 6 countries did not report using them for any category of expenditure (the Czech Republic, Denmark, Hungary, Mexico, Switzerland and Turkey). On the contrary, 17 countries use them for all categories of expenditure, and 8 use them for some categories of expenditure only (Table D6.1).

The wide-scale use of funding formulas suggests that they have a substantial effect on the amount of funding allocated to sub-central levels of government, schools or the most local level of governance.

The use of funding formulas is most common for all categories of expenditure at the highest levels of government (i.e. central or state). For example, among the 17 countries and economies with available data on general funding of educational institutions, formulas are used to allocate all public funding from central government to public primary and lower secondary educational institutions in 5 countries and most public funding in a further 12 countries (Table D6.2).

At lower levels of government, smaller proportions of public funding are allocated to educational institutions through formulas. Among the 13 countries and economies with available data for general expenditure, local government allocates all public funding through funding formulas in only one country. Among the other countries, formulas are used at the local level to allocate most public funding in nine countries, some of the public funding in one country and only a negligible amount of funding in two countries. Therefore, formula funding plays a big role in the resources received by educational institutions from local governments. However, there is greater use made of the other bases (measured in terms of the proportion of funding received) at the local level than is the case at higher levels of government. This may result from the different responsibilities of the different governments, or may simply reflect a trend of greater discretion being used in funding decisions (Table D6.2).

In the vast majority of countries and economies, funding formulas are used by central or state governments to allocate all or most funding for all categories of expenditure, with the exception of funding for capital expenditure. Capital expenditure is the category of expenditure where funding formulas are least often used compared to other three mechanisms used to fund educational institutions. It is therefore not surprising that a relatively small share of funding is allocated using them. The variation in the share of funding allocated by funding formulas is similar to the variation in the use of funding formulas. For instance, among the five categories of expenditure, funding for teaching staff is the category for which funding formulas are used the most often, and it is also the category for which the largest share of funding depends on formulas. This shows that when funding formulas are used, they tend to have a substantial impact on the share of funding (Figure D6.3 and Table D3.2).

Local governments are less likely to use funding formulas than central or state governments, but the extent of the difference varies by category of expenditure. Funding for non-teaching staff is the category of expenditure with the biggest difference between levels of government in the proportion of funds allocated based on formulas. At the central or state level, 15 countries and economies use funding formulas to allocate all or most of their funding to expenditure on non-teaching staff, and none use funding formulas to allocate some or a negligible amount of funding to this category of expenditure. At the local level, five countries use funding formulas to allocate all or most of their funding to this category of expenditure, compared to three using funding formulas to allocate some or a negligible amount of funds to this category of expenditure. This means that local governments are more likely to use methods based on discretion to allocate funding for non-teaching staff. This is quite different from capital expenditure, for which the proportion of funding allocated using formulas is lower at all levels of government, but there is little variation between levels of government (Table D6.2).

Educational equity is a broad concept and is not easily definable. The pursuit of equity in education usually takes into account three different possible strategies underpinning policy making: seeking equal opportunities, equal treatment or equal results across students and schools (Castelli, Ragazzi and Crescentini, 2012[4]). This is reflected in the choices countries make about how to allocate resources to educational institutions.

There are two main ways of considering equity in terms of education funding: horizontally and vertically. While horizontal equity refers to the provision of resources across units with similar needs (students or institutions), vertical equity refers to the distribution of resources across units of different needs. Horizontal and vertical equity can be complementary goals. While horizontal equity is assessed by minimum variability in the distribution of resources for similar students, vertical equity focuses on providing differential funding for different student groups based on their needs (OECD, 2017[1]).

The data presented below focus on the criteria that countries use to address equity when allocating resources. These criteria could be used in bidding and bargaining, funding formulas, or incremental cost methods of allocation. The choice of criteria reflects the strategies to address equity as well as the aims of horizontal and/or vertical equity.

Among the 31 OECD and partner countries and economies with available information, equity criteria used in funding the different categories of expenditure tend to relate to one of three reference groups: the population of the locality (state/region/province/municipality), the schools or the students enrolled. Criteria that relate to characteristics of the population of the locality are the least commonly used, whereas criteria relating to schools and students are more common. Of the 26 countries and economies with available data on allocation of funding by central and state governments, 25 use at least one criterion related to student characteristics, 23 use at least one criterion based on school characteristics and 14 use at least one criterion based on population characteristics (Table D6.3).

It is very common for countries to use a combination of criteria that relate to different reference groups. Twelve countries and economies use a combination of criteria including at least one criterion related to each group (students, schools and population characteristics). A further 11 countries and economies use a combination including at least one criterion that relates to student, and school characteristics only. This means that countries and economies using a population-based criterion usually also use a criterion based on student and/or school characteristics. Denmark is an exception to this pattern, as the number or proportion of low-income people in the locality and the existence of localities considered remote and/or rural are used as equity criteria, but no student- or school-based criteria are used (Figure D6.4 and Table D6.3).

As well as grouping the criteria by the population to which they refer, it is also possible to group them based on five broad characteristics to which they relate: poverty (low-income, poor or disadvantaged populations/schools/students), disability (students with disabilities), location (remote, rural or high-cost locations), immigrant status (Immigrant background of students or population) and minority communities (people who belong to minority communities and schools offering minority languages).

Criteria related to disability are the most commonly used. Of the 27 countries and economies with available data, only central and state governments in the Czech Republic, Denmark, England (United Kingdom), Mexico, Norway and Sweden do not use this equity criterion. These countries and economies tend to either give large autonomy in the way to allocate funding to schools (or most local level) to more local levels of government (Norway and Sweden), use discretionary allocation methods instead of funding formulas (the Czech Republic, Denmark and Mexico) or use other criteria to address equity (England [United Kingdom]) (Table D6.3).

Many countries and economies provide specific support to schools or localities that are either remote, expensive or both, by including criteria in funding allocation methodologies that take account of this. Central or state governments in 18 countries include in their methods to allocate public funds to schools (or most local level) criteria related to the location, compared to 8 who do not include such criteria. Across the countries using a location criterion, there is some variation in whether the criterion refers to schools (in remote or high-cost locations) or to localities (remote or rural states/regions/provinces/municipalities). Eight countries and economies (Australia, Brazil, Chile, England [United Kingdom], France, Hungary, Korea and Latvia) allocate resources based only on the school’s location, whereas four countries (Colombia, Denmark, Israel and Turkey) only allocate resources based on the remoteness or rurality of the locality. The remaining six countries (Estonia, Ireland, Japan, Poland, the Russian Federation and Switzerland) use both criteria (Table D6.3).

Most countries allocate funding using some measure of low-income or disadvantage. Of the 28 countries and economies with available data on the criteria used for the allocation of funds from central or state governments, 18 use at least one poverty-based criterion compared to 10 that do not. The most frequently used criterion is the number or proportion of low-income students, which is used by central or state governments in 14 countries and economies. However, it is very common among countries to use multiple poverty-based criteria. For example, nine countries and economies use the number or proportion of low-income students as well as schools (or most local level of governance) serving poor or disadvantaged communities (Table D6.3).

Among the five broad characteristics that have been identified to group equity criteria, criteria relating to immigrant status and minority communities are the least commonly used by central and state governments to allocate funds, even if they are still very commonly used. Immigrant status is used by central or state governments in 16 out of the 27 countries and economies with available data. When immigrant status is used, they far more often refer to students than to the population of the locality. This means funding is directed to where schools have significant numbers of students with an immigrant background enrolled rather than to areas of the country where there is a high number of people with an immigrant background living (Table D6.3).

Many criteria may be used in funding formulas (or other allocation methods), but countries can give different relative weights to each of these criteria, which means they can impact to a varying extent on the amount of funds allocated. For the allocation of funds under the responsibility of central or state governments, each criterion tends to have a modest impact on the amount or proportion of funds allocated. On average across all equity criteria, the use of an equity criterion has a large impact on funding in 5% of the countries and economies using it, a medium impact in 20% of countries and economies using it and a small impact in 50% of countries and economies using it. This suggests that equity criteria on their own have a limited impact on the funding received by schools (or the most local level of decision making) and that other criteria have a greater effect (Table D6.3).

There is some variation between criteria in their impact on funding. Among the 14 countries and economies where the central or state government uses the number or proportion of low-income students in the allocation of funds, this criterion has a medium impact on the funding allocated in 6 countries and economies and a small impact in 4 (the impact is unknown in the remaining 4 countries). In comparison, the number or proportion of students with disabilities has a large impact on funding in three countries and economies, a medium impact in seven countries and a small impact in seven countries (the impact is unknown in the remaining four countries). The result is that where the number or proportion of students with disabilities is used as a criterion in funding allocations, it has a greater impact on funding than where the number or proportion of low-income students is used (Figure D6.4).

See Box D6.1 for definitions related to bases for allocation, criteria used to allocate funding and type of funding mechanisms.

Central government: The central government consists of all bodies at the national level that take decisions or participate in different aspects of decision making.

State government: The state is the first territorial unit below the nation in “federal” countries or countries with similar types of governmental structures. State governments are the decision-making bodies at this governmental level. For all other countries, this level does not exist.

Provincial/regional authorities or governments: The province or the region is the first territorial unit below the national level in countries that do not have a “federal” (or similar) type of governmental structure and the second territorial unit below the national level in countries with “federal” (or similar) types of governmental structures. Provincial/regional authorities or governments are the decision-making bodies at this level.

Sub-regional or inter-municipal authorities or governments: The sub-region is the second territorial unit below the national level in countries that do not have a “federal” (or similar) type of governmental structure. Sub-regional or inter-municipal authorities or governments are the decision-making bodies at this level.

Local government: The municipality or community is the smallest territorial unit in the country with a governing authority. The local authority may be the education department within a general-purpose local government, or it may be a special-purpose government whose sole area of authority is education.

Thirty-one OECD and partner countries and economies contributed to the 2020 OECD-NESLI survey on school funding frameworks used to develop this indicator: Australia, Austria, Brazil, Chile, Colombia, the Czech Republic, Denmark, England (United Kingdom), Estonia, Finland, France, the French Community of Belgium, Germany, Hungary, Ireland, Israel, Japan, Korea, Latvia, Lithuania, Mexico, the Netherlands, Norway, Poland, the Russian Federation, Slovenia, Spain, Sweden, Switzerland, Turkey and the United States.

The information collected on funding frameworks was limited to the main funding mechanisms used to allocate and distribute public funding to public educational institutions (or the most local level of governance). This means that some funding is not covered by the analysis. However, in around half of the countries with available data, all of the public funding for public educational institutions is covered by the analysis and most public funding for public educational institutions is covered by another third of countries. See Annex 3 for more information and for country-specific notes (https://www.oecd.org/education/education-at-a-glance/EAG2021_Annex3_ChapterD.pdf).

Data are from the 2020 OECD-NESLI survey on school funding frameworks, which refers to the year 2019.

References

[3] Atkinson, M. et al. (2005), School Funding: A Review of Existing Models in European and OECD Countries, National Foundation for Educational Research, Slough, https://www.nfer.ac.uk/publications/ESF01/ESF01.pdf (accessed on 25 May 2021).

[2] Burns, T. and F. Köster (eds.) (2016), Governing Education in a Complex World, Educational Research and Innovation, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264255364-en.

[4] Castelli, L., S. Ragazzi and A. Crescentini (2012), “Equity in education: A general overview”, Procedia - Social and Behavioral Sciences, Vol. 69, pp. 2243-2250, http://dx.doi.org/10.1016/j.sbspro.2012.12.194.

[1] OECD (2017), The Funding of School Education: Connecting Resources and Learning, OECD Reviews of School Resources, OECD Publishing, Paris, https://dx.doi.org/10.1787/9789264276147-en.

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