budget. The estimated marginal effects of the determinant factors across countries can be estimated and used to predict roughly the level that a country with a specific set of economic and demographic characteristics would be likely to spend on education. The prediction reported above is based on panel data from developing and industrialized countries over the period 1976-2000. Expenditure data is drawn from the IMF’s Government Financial Statistics. Unfortunately this exercise is rather data exhaustive and the latest year available for the whole series has typically a lag from three to four years.<sup>11</sup> What can be concluded, with some degree of confidence, is that that the level of education spending is not, by any means, significantly below what could be the optimal level relative to the overall national budget, especially taking into account further evidence suggesting that spending in other sectors such as infrastructure and health are below their optimal levels (World Bank, 2007).

# _Economic Composition by Level of Government_

In 2005 the majority of education expenditures, approximately 62 percent, was executed at the sub-national level. District governments are the main spenders, accounting for 57 percent of total spending; with provinces accounting for 6 percent. These shares of total education expenditures have been somehow stable since 2001 (Table 4).

**Table 4** Nominal Education Expenditures per Level of Government 2001–05 _Rp. trillion_

||**2001 **|**%**|**2002**|**%**|**2003**|**%**|**2004**|%|**2005* **|**%**|
|---|---|---|---|---|---|---|---|---|---|---|
|**Central**|**12.6**|**31**|**13.8**|**27**|**21.3**|**34**|**19.4**|**31**|**28.3**|**38**|
|Development|8.5|67|9.2|67|16.0|75|12.3|63|17.1|60|
|Routine|4.1|33|4.6|33|5.4|25|7.1|37|11.3|40|
|**Provincial**|**1.9**|**5**|**4.0**|**8**|**3.9**|**6**|**2.6**|**4.1**|**3.8**|**5**|
|Development|1.4|70|2.6|66|3.1|80|1.8|69|2.9|77|
|Routine|0.6|30|1.4|34|0.8|20|0.8|31|0.9|23|
|**District**|**26.2**|**64**|**32.6**|**65**|**38.3**|**60**|**39.8**|**64**|**41.8**|**57**|
|Development|3.0|11|4.6|14|5.3|14|4.6|12|5.1|12|
|Routine|23.2|89|28.0|86|33.0|86|35.2|88|36.8|88|
|**Total Expenditures**|**40.8**|**100**|**50.4**|**100**|**63.6**|**100**|**61.8**|**100**|**74.0**|**100**|

_Source_ : Computed by World Bank staff based on data from MoF. _Note_ : * Due to the reform in the budget system the 2005 central development spending figure reported here is an approximation of the old format equal to capital spending (Rp 2.0 trillion) plus social aid (Rp 15 trillion).

Even though district governments spend the majority of the total education budget, these expenditures are mostly nondiscretionary routine expenditures. Hence, while decentralization formally devolved the responsibilities for education from the central level to the sub-national level, the majority of the _development_ expenditures (closer available to the definition of ‘capital expenditures’ before 2005) is still spent by the central government. Since 2001, the central government has been consistently covering more than 55 percent of total development spending, with districts only covering approximately a quarter. Furthermore, as it is discussed in further detail in section four, subnational governments do not have any discretion over their personnel administration either, due to the mechanism of allocation of the general allocation transfer (DAU). Hence, despite their apparently large participation in the sector, local governments have surprisingly little discretion in managing funds and shaping the key education sector decisions, with the adverse effects of weakening the accountability links of the decentralized system.

> 11 See annex 2 for further details on the methodology employed for this estimation.

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