Determinants of the budget deficit of Ministry of Education in Iran

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1 Determinants of the budget deficit of Ministry of Education in Iran Abdollah Ansari Assistant professor, Department of Economics of Education, Institute for Educational Research, Abstract Budget deficit occurs when costs prediction exceeds from income at the beginning of the fiscal year. In this paper Vector Auto Regressive, Impulse Response function and Variance decomposition has been used with VECM methods of Johansson - Juselius to find out factors effecting budget deficit for Ministry of education. Short period relation between variables for the time period of also has been estimated. The results showed that, in the short run the budget deficit changes had no relationship with Student numbers, government revenues fluctuating and was also not affected by contracting fiscal policies of government. In addition, the variables of budget deficit of Ministry of education and the government s budget deficit, with delay have had negative and positive effects on budget deficit of Ministry of education, respectively. The results from variance decomposition also showed that most of the changes in the budget deficit of Ministry of education belonged to the variable itself (approximately 60 percent) in 20 years period and in next rank explained by Government budget deficit, paid credits of education, government expenditure and finally government fiscal policies, respectively. Therefore goals, approved programs and the performance of ministry of education don t effect on the budget deficit for Ministry of education. Key words: Budget deficit of education system, Vector Auto Regressive, VECM Introduction Budget deficit occurs when costs prediction exceeds from income at the beginning of the fiscal year. Nominal deficit is resulted in gap between accounting income and expenses while real or hidden deficit is because of overestimate of incomes or low estimation of costs in beginning of the fiscal year. [5] Generally, budget deficit of Ministry of education appears when the amount of government payment from public funds is lower than consuming budget.excess payments of approved budget is done in accordance with contents and provisions of the Act and law and sometimes based on the decision of related authorities (such as Islamic parliament). In budget implementation, the centralized credit funds are usually distributed among administrative agencies of government during fiscal year. In addition, some Articles of budget provisions and Acts let government to replace unconsumed credits among administrative sectors or inside parts related to a sector. These authorities and quarter credit allocation mechanism enable government to adjust the payment level of an administration over its budget and compensate its budget deficit. With this description, it can be said administrations that were faced with such a deficit, have had precarious budgetary situation since beginning of the year and they had to constantly dispute with budget allocating authorities to get more credits. The special problem of Ministry of education is current budget deficit. Although the budget deficit has been financed at the end of each year but its debilitating effects on management has been tangible since 1991 because it has made Ministry of Education facing with uncertainty from beginning of the year and it is time consuming for authorities to meet the budget deficit.different reasons can be stated for budget deficit of Education System. Some parts are related to implementation of new regulations, laws and employment rules after signification of budget Act and others are related to lack of proper credit allocation patterns which led to allocating lower credit compared with needed amount, without considering real needs of Education. For example, annual budget of Education is increased in percentage form of approved statistics rather than considering its performance (paid credits) which leads to budget deficit of Ministry of Education and sequence role to it. [10]Therefore, methods, laws and even the time of budget programming can effect on budget deficit. Wan Hagen (1992) and Harden (1996) believe that executive or non-executive of budget should be firstly investigated and then it should be approved by parliament and send for implementation. [15], [16]Lack of efficient processes for monitoring budget and credit allocation in governmental institutions leads to the consideration that with the allocation of lower credit level than needed, knowingly and intentionally makes Ministry of Education face savings and optimal use of sources by allocating credits to its most necessary needs. The economic condition can also effect on budget deficit of Ministry of Education. Government budget deficit is defined as a difference between expenses and revenues of government and 275

2 Determinants of the budget increase of government revenues can improve the public budget revenues and decrease the budget deficit. Since, oil revenue has great share in budget revenues of government in Iran economy; it is predicted that it has negative relationship with budget deficit. For example, oil revenue reduction due to the reasons such as price reduction and embargo on oil purchases leads to unpredicted reduction of government revenue and therefore lack of allocating approved credits.in addition, increase in government expenditures, contracting policies of government because of fiscal conservatism and against inflation, war periods and costs related to military facilities supplying and years of presidential election have positive relationship with budget deficit based on political budget cycles theory. GDP growth may lead to budget deficit reduction by increasing tax revenues.to explain factors effecting on budget deficit for Ministry of education, budget deficit is considered dependent variable and variables: paid credits, government budget deficit and oil income, student population growth and years of fiscal contracting policies considered as independent. Literature Review Ansari, abdollah (2014) has concluded that non personnel credits of Ministry of education in Iran have been affected by the growth rate of the number of employees and size of credits for the previous year. [2] Komijani (2012) using data ( ) concluded that oil income, tax revenue and economic growth has negative effect, while government subsidies and public expenditures has positive effect on government budget deficit. [8] Javadi, Maryam (2011) states that the rate of the student population growth and size of previous year credits had been affected on the education system s credit. [7] Strawczynski and Zeira (2003) showed that the population size has a positive and significant effect, Composition of student population has a negative effect and income or per capita GDP has a positive and significant effect on the increase of the share of public education spending.[11] Verbena and Chowdhury (2002) showed that in the newly independent countries of the former soviet, government income and the number of students has a positive and population density in the area has a negative effect on government educational expenditures. [16]Cardoso (1998) showed that inflation effects on budget deficit by tax intervals and real expenses. [3] [12] Jafari Samimi (1992) In his study about investigating the relationship between budget deficit and inflation in Iran economy during , concluded that increased inflation rate leads to nominal budget deficit of government.[6] Public choice theory argued that budget deficit is due to the exerting political pressure to politicians by related entities; in which governments usually look for improve public welfare by utilizing budget deficit in order to increase their chance of getting selected in each presidential election period. Regef (1990) and Alsina et al (1997) have investigated this theory. [4]Tansy (1987) believes that increased inflation rate can decrease real tax revenues and increase budget deficit. [13] Aghevli & Khan (1978) in their study have investigated the relationship between budget deficit and inflation in four different countries and concluded that government expenses increased in higher rate compared with government revenue against inflation. [1]The office of cultural studies of Islamic Parliament Research Centre )2005) has introduced the inappropriate allocated budget to Education Ministry as Origin of budget deficit and noted that the growth of expense) paid ( credits were lower than other governmental sector during the third development plan of Iran. The share of budget deficit from education budget Ministry of Education has faced with credits deficit phenomenon for several decades. In this section we look at changes in credit deficit of public education system during (2014 Estimated) 672

3 Table 1. Ratio of budget deficit to approved budget of public education in Iran (percentage) Year Ratio of deficit budget to approved budget of education (percentage) Year Ratio of deficit budget to approved budget of education (percentage) (Estimated) 22.3 Source: statistics and planning and budget office. Ministry of Education in 2014 Diagram 1: Ratio of budget deficit to approved budget of Ministry of education (percentage) Source: table According to the above table this deficit has become a chronic phenomenon by various swings and has exceed more than half of approved budget in some years.this phenomenon has caused tribulation in providing educational services process by creating delay in payment of legal claims of teachers and wasting the energy and time of policy decision-makers and has reduced their quality. The investigation of budget deficit information in current prices shows that it has increased in time, but it has had significant reduction during 2010 and Methodology, Data and Model In this research, the method was causal comparative. According to the vectored autoregressive patterns which are unlimited in variable selecting and performed studies in Iran and other sides of world, it was tried to identify a causal model. In this regard linear combination was used in combine with criterion variable of budget deficit for Ministry of education and prediction of government expenditures, public credits of Ministry of education, government budget deficit, gross domestic product, government income, inflation ratio, government oil income, student population and dummy variables during war times, years of 677

4 Determinants of the budget presidential election and government contracting fiscal policies variables.time series data related to the macroeconomic variables like government incomes, oil incomes of the government, government expenditures, gross domestic production, inflation ratio and liquidity growth rate are from a set of economic and social time series data from the Central Statistics of Iran, Central bank of the Islamic republic of Iran and information related to budget and budget deficit of the education system and number of students were gathered from the office of statistics and planning and budget of Ministry of education. All of variables were introduced to model in time series form and the under study period was In this article, advanced time series analyzing methods based on stationary test, co integration and causality test were used for model making and estimating. This method is used to explain the dynamics of model and shows that what percent of dependent variable changes is explained by each of existed variables in model during the time. The used model for analyzing short and long term relations of budget deficit for Ministry of education and factors effecting it, estimating parameters and predicting relations, is Vector error correction model (VECM) of Johansen-Juselius, with co integration characteristics between economic variables.econometric modeling was done by using common time series method and based on the assumption that time series variables are stationary. According to this assumption, the variance and mean of variables are constant during the time and the co variance between each two values of time series variable only depends on the interval between them. Findings In this section the findings obtained from ordinary least squares model and vector regression with the results of the unit root tests and Johansen-Juselius have been provided and analyzed. Model variables: G DF BD: Government budget deficit REL BUD: Paid credits of the education system BUD DF: Budget deficit of Ministry of education OILIN: Government oil income INF: inflation ratio EX: government expenditures GDP: Gross domestic product LIQ: Liquidity growth rate ELEC: Presidential election years DPOP: Student population growth rate PER: Number of staff employed DUMMY: Dummy variable for the years of government fiscal contracting policies (for the years that the rate of government Consumption expenditures was negative considered equal to 1 and for other years 0.) W: dummy variable for war (for war times included 1 and for other years 0) Ordinary least squares estimation In this path firstly, long-term linear relationship between all the mentioned variables (as independent variables) with the budget deficit of Ministry of education (as a dependent variable) was estimated by Ordinary least squares (OLS) and the results include: 672 Table 2- Estimated results of Ordinary least squares OLS Variables Coefficient Possibility Intercept G DF BUD * REL BUD * OIL IN GDP * W INF LIQ EX * D POP PER DUMMY* ELEC Source: Researcher s calculations with the use of Eviews software

5 *The Starred variables are significant at confidence level of 95 percent. The results of Table 2 show that the coefficients of the government budget deficit, and (actual) paid credits of education have positive and significant relationship, while GDP, government expenditures and dummy variable related to years of contracting fiscal policy have a negative and significant relationship.meanwhile, government oil income, inflation ratio, growth rate of liquidity and rate of population growth of students and number of staff employed variables with dummy variables for war years and years of presidential election didn t have a significant relation. Following significant variables were placed in the vector Auto regression model. Vector Auto regression model: The following is estimated a reduced form of vector Auto regression as follows: Z t C 1 Z t 1 U t Where, Z t a vector 5 x 1 is dependent variable in time t and C is Coefficients Matrix for independent 1 variables. All the variables in the above simple regression which were significant are placed in the years 1991 till 2013 and are endogenous. Tests of unit root: To avoid the consequences of spurious regression and evaluate the possibility of achieving co integration vectors, it is necessary for the variables to be determined by the Stationary test and the degree of co integration. To evaluate the Stationary of the time series, the augmented Dickey-Fuller test was used. The used results of this test for the entire independent variables of vector auto regression model are as follows: Table 3: The unit root test results for all variables Name of variables Test Statistics values Crisis values 1% Crisis Values 5% Crisis values 10% Test result BUD DEF I(0) ` Budget Deficit of Ministry of education Is on a Stationary level G DEF BUD Government deficit credits I(0) Is on a Stationary level REAL BUD Paid credits of the education system I(1) Is Stationary with a time difference measurement GDP gross domestic product I(1) Is Stationary with a time difference measurement DUMMY dummy variable for the years of contraction policies of the government PASMAND Residuals I(0) Is on a Stationary level I(0) Is on a Stationary level According to the information on table 3, all the variables except paid credits of Ministry of education, gross domestic production and government expenditures which were Stationary with a time difference measurement, the rest of the variables were on a Stationary level. Therefore combining these variables, co integration was in first order and it was possible to estimate the vector auto regression model. Determine the order of vector regression model: Since the Johansson-Juselius method is based on a VAR model, it s necessary that a VAR model estimated and Order of the VAR model using model selection criteria meaning Shwartz-Bizin (SBC), Acaik(AIC) and HananQuiin (HQC), determined before estimating Auto-Regressive process model. Table 4- Different criteria to determine the order of the model Pause AIC SBC HQC 0 110, , , , , , , , , , , ,

6 Determinants of the budget According to the table information, if each of the criteria is placed as a base, the order or optimal interval equals to 3. Determining the number of co integration vectors: Various methods existed in model to determine the co integration vectors. In present study, Johansen s test was used and the results were provided in the co-integration table below: Table 5: Determining the number of co integration vectors used by Johansen s test The maximum Critical Number of The test Critical Characteristic eigenvalue test value on cointegration statistic value on root of statistic the level vectors based on result the level eigenvalue Maximum of the null hypothesis trace of %5 eigenvalue %5 None* , ,223 57,764 42,142 At most 1* ,987 68,987 38,104 35,266 At most , ,523 27, ,342 At most , ,802 9, ,852 At most , ,2451 7, ,9854 The results of table 5 show that the hypnosis of lack of co integration vector and also the existence of one co integration vector is rejected. The number of co integration vectors in the level of 5% is obtained equal to 2 by doing both trace test and maximum eigenvalue which implies the existence of long-term relationship between the variables of the model. Estimating vector error correction model: Since the entire model variables were not on a stationary level but were co integration, it was appropriate to use the vector error correction in order to estimate the model. The optimal lag length of variables with the use of Akaic, Shwartz-Bizin and Hanan-Quiin statistics were equal to 3 intervals. In addition, the numbers of co integration vector models, with the use of Johansen s convergence test, were two vectors. Therefore vector error correction model was estimated and the results have been shown in the table below: Table 6: The estimated results of vector error correction model The dependent variable: BUD DF (Budget deficit of Ministry of education) Independent variable Estimation Statistic T C -4672, ECM(-1)* D(BUD DF(-1)) * D(G DEF BUD (-1))* D(REALBUD(-1)) GDP D(EX(-1)) D(DUMMY(-1)) , *Starred variables on a significant level are 95 percent significant. Findings show that the dependent variable is endogenous and indicates the long run causal relation from independent variables to dependent variables. By reviewing the rest of the model variables, it can be understood that in a short run, budget deficit of Ministry of education and government budget deficit variables effect on the dependent variable with delay and is significant on a 95 percent level. In the other words, budget deficit of the Ministry of education as a dependent variable has a negative significant relation in a one year lag by itself and shows that during the course on average, budget deficit after the year which experienced positive growth, has met with reduction. In addition the positive and significant relation of the budget deficit variable of the Ministry of education with government budget deficit variable means that reduce (increase) of the education budget deficit is parallel to reduction (increase) of government budget deficit. It should be emphasized that other variables don t have significant relations with the variable of budget deficit. 622

7 Short-term dynamics: Since the interpretation of the result of vector auto regression models about the obtained coefficients is difficult, for the inference of the related results and generally reviewing the short-term dynamics of the model the impulse response function and variance decomposition are used. Impulse response function: The impulse response function indicates that if a shock in a size of one standard deviation happens in every one of the endogenous variables of the model, how would the effect of it on budget deficit of the Ministry of education be in future period. Table 7: The effect of shocks on each of the endogenous variables of the model on the size of budget deficit of Ministry of education Period Budget deficit paid credits of Ministry of education GDP Government Budget deficit dummy (years of government contractionary policies) Government expenditures , ,34 24, , ,41 4, , ,375 16, , ,565 4, , ,484 18, , ,283 8, , ,664 13, , ,416 9, , ,714 13, , ,626 11, , ,166 11, , ,915 11, , ,596 11, , ,837 12, , ,541 11, , ,263 12, , ,405 11, , ,438 12, , ,284 11,68 Information on the first line indicates that when a shock as a standard deviation was given in the size of budget deficit of Ministry of education, the effect of this shock on the budget deficit of Ministry of education during 20 years period was in a way that the credits deficit in the first year increased by 1 unit, in second and third year reduced, in the fourth year increased and after that has been reduced and till the end of the course has been stabilized on 0.20 level. In addition if a positive shock equivalent to one standard deviation was given on government budget deficit, it has no effect in the first year on the budget deficit of Ministry of education while from fourth year increases and almost stabilizes in middle years on 0.06 level. Variance Decomposition In this method, the prediction error variance is decomposed to elements that take each variable shocks and make it possible to estimate that what percentage of prediction errors is explained by the changing of variable, itself and what percentage of prediction error is explained by changing of other variables. The results of Variance decomposition of budget deficit of Ministry of education are shown in the table below: 622

8 Determinants of the budget Table 8: The results of Variance decomposition of the budget deficit of Ministry of education (percentage) period S.E DEF G DF BD GDP EX REL DUMMY BUD Government Government BUD variable of budget expenditures Paid the deficit credits government policy / Source: The researcher s calculations using Eviews software In the first period, the entire error variance of the budget deficit is explained by the the variable itself. In the second period 64 percent of error variance Justified by the variable itself and 16 percent by government budget deficit, 2 percent by GDP and 1 percent by government expenditures, 12 percent by paid credits of education system and 3 percent by dummy variable for government contracting fiscal policies. In the last period it can be also observed that, approximately 49 percent of changes in budget deficit of ministry of education Justified by the variable itself, 18 percent by budget deficit of government, 3.7 percent by growth rate of GDP, 9 percent by government expenditures, 15 percent by paid credits of Ministry of education and finally 4.7 percent by dummy variable for fiscal policies of the government are explained. It can be concluded that in a 20 years period, the most share in changes of budget deficit of Ministry of education was explained by variable itself (approximately 60 percent) and after that explained by government budget deficit, paid credit for Ministry of education, government expenditures, dummy variable of government fiscal policies and growth rate of GDP respectively. SUMMARY AND CONCLUSION In this paper, it was attempted to evaluate the effective factors on budget deficit for Ministry of education using Vector Error Correction (VECM) model. According to the Vector Auto regressive patterns which are unlimited in variable selecting and performed studies in Iran and other sides of world, it was tried to identify a causal model to explain relationship between budget deficit of education system with other variables.in a short period, budget deficit for Ministry of education and government budget deficit variables with a delay had negative and positive effect on the dependent variable of model (budget deficit of Ministry of education), respectively. Positive and significant relation between budget deficit of Ministry of education and government budget deficit means that change in growth rate of budget deficit is parallel with government budget deficit.in addition, government oil income, inflation rate, growth rate of student population and number of staff employed, dummy variables of war and presidential election years variables don t have significant relation with budget deficit of Ministry of education.the results from variance decomposition also 626

9 indicated that the most shares in changing of the budget deficit for Ministry of education was explained by the variable itself (approximately 60 percent) in 20 years period and after that by government budget deficit, paid credits of Ministry of education, government expenditures and finally government fiscal policy, respectively. In summary the budget deficit of Ministry of education is only affected by the amount of credits deficit in previous year and government budget deficit which indicates the lack of efficient patterns of credit allocation that leads to allocate credits lower than needed amount, without considering real needs of education. Therefore goals, approved programs and the performance of ministry of education don t effect on the budget deficit for Ministry of education. In addition, budget deficit of Ministry of education is not depended on the general government revenues and oil incomes and the government s contracting fiscal policies for inhibiting the macroeconomic variables like inflation and unemployment. Therefore the subject of determination of budget deficit of Ministry of education should be considered as a phenomenon based decision making and be studied in the area of political economics. According to the Constitution, the government is responsible for public education financing and the main solution for dealing with these challenges, is differentiation between the area of decision of the government and state. Therefore since the constitution of the Islamic republic of Iran places the oil sources to the Islamic state (and not the government) hands, Distinction between the two concepts of government and state can open a new portal for the discussion about reforming the share of the budget deficit in the education system. Therefore it is recommended to the allocation of human resources development policies, from the government officials who are not periodical be approved and be delivered to the government and parliament for the annual credits. References 1- Aghevli B., Khan M., "Government deficits and the inflationary process in developing countries", IMF staff papers, Vol. 25, pp , Ansari Abdollah. (2014), Wagner theory test to determine the factors affecting non-personnel budget allocations to education Journal of Education, Cardoso e.,"virtual Deficits and the Patinkin Effect", IMF WORKING PAPER, no.41, March Galli E., Padovano F., "A Comparative Test of Alternative Theories of the Determinants of Italian Public" Deficits ( ), Public Choice, Vol. 113, Ghasemi and others, budget planning in Iran, Budget and colleagues research center for islamic parliament office for studies, programming and budget summer of Jafari samimi, A., Evaluating inflation relation and budget deficit in Iran, Scientific Journal of economic and management research. 7- Javadi, Maryam. (2011), Evaluation of the provision of general education credits and comparison with countries in the region Research Project, Institute of Education, Komijani, Estimate of factors effecting on budget deficit in Iran, Rahbord No. 64, Autumn Mehnatfar, Y., Jafari samimi, A. (1999), Determinats of Government current Expenditures in provinces, spring 1998, No. 10, Office of cultural studies center of parliament research, About budget suggestion for year 2005 for the whole country, education system, consumption or capital institution. 11- Strawczynski, Michel and Zeira, Joseph (2003). What determines education expenditure in Israel? Israel Economics Review (1). 12- Taghavi, M., Sani DAnesh, AR., (1996), Causes an increase in the size of government activities, Journal of Applied Public Administration, 1996, No Tanzi V., "Inflation, Real Tax revenues and the case for Inflationary Finance:Theory with an application to Argentina", IMF STAFF PAPER,Vol.25, sep Von Hagen J., "Budgeting Procedures and fiscal Performance in the European Community", Commission of the European Communities, Economic Paper N. 96, Von Hagen J., Harden J., "Budget Processes and Commitment to Fiscal Discipline", European Economic Review, Vol. 39, Verbina, I., Chowdhury A., "What Determines Public Education Expenditure in a Transition Economy?" World Institute for Development Economics Research. United Nations Univers,