Abstract WP16-01

This paper argues for a macroeconomic linkage between demographic transition (through age structure transition), public spending (or consumption expenditure) on education and economic growth to answer important policy relevant questions including: How does age structure transition impact on public spending on education? Will age structure transition result in savings of public resources in elementary education? If so, can those savings be the new sources of public expenditure for secondary and higher education? How to separate consumption and production effects on economic growth within the public consumption expenditure on education? What are the nature, magnitude and duration of growth effects of public education spending through human capital formation? Using the National Transfer Accounts methodology and a model of expenditure forecast, these questions are answered by the following analyses with reference to public consumption expenditure on education. Age profile of public education expenditure by levels of education is calculated for the benchmark year 2005 and forecast up to 2100. Impact of age structure transition on public education spending is (a) distinguished by age and levels of education, (b) decomposed by age structure and other effects, and (c) explored on reallocation of resources by levels of education. Growth effects of public education spending forecast on consumption and investment are calculated through demographic dividend up to 2050. Forecast results show that age structure transition reduces public education expenditure on pre-secondary education because of a long term decline in young (less than 14 years) population. A decomposition of sources for the decline in public expenditure shows that age structure transition is a major source for the decline as compared to changes in per capita spending levels and interaction effects between age structure transition and changes in spending levels. Results on growth effects show that the demographic dividend can be positive, higher and longer up to 2050, if more public education spending on human capital formation is reallocated for the secondary and higher education and the growth of those spending are linked to growth rate of nominal productivity. Thus, in the context of the demographic transition over the period 2005 to 2050, new long term policies on size and reallocation of public spending by levels of education are essential for attainment of higher economic growth for India or to offset the negative growth effects of population ageing. These new macroeconomic evidences and implications provide useful design parameters for such new policies on public education spending, at present and in future. In addition, subject to the comparability of socio-economic and demographic structures, the above macroeconomic approach and implications are of relevance for other developing countries in Asia and elsewhere in the world.