Understanding government education and health spending in China

Abstract

This research evaluates government education and health spending in China and explores the underlying determinants of its spatial pattern. A framework defining local needs at three levels is proposed to analyze whether the expenditure has been reasonably allocated. Results show that both government education and health spending closely respond to local needs at the general level. The illiteracy rate is positively correlated with government education spending while the life expectancy is negatively correlated with government health spending. On the demand and supply sides, while government education spending is more responsive to local demand measured by student number, the needs from the supply side represented by the number of medical personnel appear to be more relevant when governments distribute resources into the health sector. One particular area that needs more effort is the responsiveness to the needs arising from the lack of teaching staff. The student-teaching ratio is now largely ignored when governments make decisions of education outlays. Given that the adequacy of teaching staff is a must to ensure the quality of teaching, governments are thus suggested to put more weights to this aspect in its decision-making process.

As for the determinants of government education and health spending, this study takes a close look at three groups of key potential explaining factors identified in the existing literature – economic development, openness and decentralization. The findings pose challenges to the existing mainstream theories developed in the western context. Only per capita gross regional product is found to have significant explanatory power for budgetary expenditure on education and a significant negative relationship is revealed. On the other hand, both economic development and the degree of fiscal dependency are significant in explaining the spatial pattern of government health spending; and their relationships are both non-linear. The fixed-effects panel data regression model predicts that, ceteris paribus, a province with a per capita gross regional product of 20,265 yuan would have the most government health outlays while a province with a fiscal dependency ratio of 63.6% would have the lowest public health expenditure. Provinces with either higher or lower per capita GRP (fiscal dependency ratio) than the threshold value allocate fewer (more) resources into government health outlays. The most important recommendation derived from the findings of this dissertation is that the central government should keep an eye on those provinces that are neither fully financially dependent nor fully financially independent, because their government health spending tends to be particularly inadequate.