Is higher allocation of funds for education, a viable demand?

3 September 2012 06:30 pm - 0 - {{hitsCtrl.values.hits}}

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By Dr. D S Wijesinghe
It is encouraging to learn, through various statements made by representatives of Federation of University Teachers Association (FUTA ) on their prolonged strike, that university academics are keenly interested in getting themselves involved in various issues pertaining to the wellbeing of the people of the country and designing policies to deal with them.

Intellectuals with a vast knowledge in their respective fields are concentrated in universities and in most countries, they are actively involved in research, analyzing pressing issues and recommending policies which are heavily discussed and considered in policy designing. Through their invaluable contributions, they have earned the respect and recognition and quite often get themselves invited by authorities for further contributions. Their participation in policy discussions and decisions are not by their own demand, but through the recognition of their proven track record.

Why 6% of GDP?
In this back ground, let us closely examine one of the key demands of FUTA which is to raise the allocation of funds for education by the government to an amount equivalent to 6 per cent of GDP. It is claimed that this is in line with a recommendation of the UNESCO. However, as it appears from the information given in its Website, UNESCO, under its goal on education for all, is simply encouraging governments to invest 4- 6 per cent of GNP and 15-20 per cent of public expenditures in education, depending on the country’s demographic and economic status.

There was also a claim in an article to a daily news paper by a professor from University of Peradeniya that by committing itself to the Millennium Development Goals (MDGs), government has agreed to allocate 6 per cent of GDP for education. However, as we understand, the commitment under the MDG on education is for universal primary education and it does not require the country to allocate state funds up to 6 per cent of GDP. According to the latest World Development Indicators published by the World Bank, only a few countries such as Sweden and Botswana have allocated public funds amounting to more than 5 per cent of GDI (World Bank data base has replaced GDP with GDI, Gross Domestic Income). The allocation for education by even the developed countries such as USA and UK has been around 5 per cent of GDI. Our neighbor, India has allocated 3.1 per cent of GDI while the allocation of Sri Lanka is in par with Bangladesh at 1.8 per cent of GDI. Accordingly, 6 per cent is not a magic number to be reached by each and every country. Each country needs to make a careful assessment of the current state of its education system, its development requirements and funding requirements. It is on the basis of such an analysis that a decision on the extent of allocation of state funds for education be made, taking into consideration other competing demands for state funds as well.

Need for containing budget deficit
Successive governments   have faced with the daunting task of allocating limited resources to meet competing demands and quite often, funds have to be borrowed even to meet current expenditures. The deficit of the government budget has remained a chronic problem in this country, despite the efforts of successive governments to reduce it. Repercussions of a continued high budget deficit are well known and well recognized. Usually, due to a lack of resources in the non-banking sector, the deficit is largely financed by borrowing money from banks including the central bank, which   amounts to the creation and infusion of new money into the economy and hence, it leads to high inflation, erosion of competitiveness of local products, slow growth, balance of payments difficulties, depreciation of the local currency and accumulation of debt, both domestic and external. Even if the deficit is financed through borrowing from the non-banking sector which is considered non expansionary as it does not lead to a creation of money, due to the lack of resources in that sector, it crowds out the private sector which is a diversion of resources from a relatively more productive sector to a less productive sector, forcing everyone to pay a higher interest rate on their funding requirements. These repercussions have well been demonstrated in Sri Lanka which had maintained a deficit of 8 per cent of GDP, on average during the last two decades. It used to be even higher at or above 10 per cent of GDP during the 1980s. Though there have been successes in reducing the deficit in certain periods, there have also been reversals. With the conclusion of the war against terror, under the stabilization programme commenced in 2009, there has been a progress in reducing the deficit and by 2011 it has reached 6.9 per cent of GDP. The present target is to reduce the deficit to 5.0 per cent of GDP by 2015. Accordingly, decisions pertaining to expenditures and revenues of the government have to be made in line with the objective of achieving this fiscal target which is a must for sustainable development of the country.

Tax reforms and reclining trend in govt revenue, expenditure
Naturally, any government would like to maintain a high level of expenditure to boost its popularity by spending on various socio economic activities. However, its overall level of expenditure is constrained by the need for containing the budget deficit and availability of revenues. The government revenue is largely derived (around 87 per cent at present) from various taxes and there has been a steady decline in the revenue. It has declined from an average of 22.5 per cent of GDP per year during 1980-1989 to an average of 15.8 per cent of GDP per year during 2005-2011.The revenue stood at 14.5 per cent of GDP in 2011. The continued decline in the revenue is largely a reflection of the impact of the reforms introduced over time to simplify the tax system by removing its complexities and cascading effects and thereby, to promote economic activities. It is also important to note that out of the tax revenue, less than 20 per cent is from direct taxes on incomes while the balance is from indirect taxes which are added to the prices of goods and services and paid by everyone whenever a good or service is purchased. Further simplifications in the tax system to promote economic activity are expected and hence, an increase in the tax revenue would only be through the widening of the tax base and improved tax compliance. Such improvements however, are gradual and rather slow to realize, as revealed through the experience in the past.

In line with this decline in revenue together with the effort to contain the budget deficit, there has been a corresponding decline in government expenditure as a proportion of GDP. During the 1980s, the government expenditures amounted to an average of 34.0 per cent of GDP per year and it declined to an average of 23.3 per cent per year during 2005-2011. It stood at 21.4 per cent of GDP in 2011. The proposed increase in the allocation for education to 6.0 per cent of GDP needs to be reviewed against this background of declining revenues and expenditures in relation to GDP, an outcome of polices to promote economic growth and stability.

Options for allocating more state funds
Under the medium term macroeconomic framework of the government, the expectation is to bring the budget deficit to 5.0 per cent by 2015 by raising the revenues to 15.7 per cent of GDP mainly through improvements to tax administration and further containing expenditures to 20.7 per cent of GDP. Accordingly, it would be a formidable task to raise the allocation for education to 6.0 per cent of GDP from its current level of around 1.9 per cent. Most of the expenditure commitments, in particular those of the current nature, are fixed and hence, it is rather unlikely that allocations for purposes other than education could be reduced sufficiently to provide for such a higher allocation for education. Under the circumstance, either the budget deficit or government revenue has to be raised. A higher deficit would be a reversal of the achievement in the stabilization program, eventually pushing the entire nation to suffer from high inflation and slow growth. A higher tax would also be a reversal in the tax policy, a withdrawal of incentives for economic activities. It will require every one, both rich and poor to pay higher taxes as an increase in tax revenue would effectively be realized mainly through indirect taxes.

In order to provide for a higher allocation for education, the same professor whose   news paper article was referred to in the second Para of this paper, has suggested eliminating wasteful expenditures and improving tax administration. There are of course wasteful expenditures and scopes for improvements to tax administration, but these are common suggestions often made without presenting a precise plan to implement the suggestions. As pointed out by some, politicians may be wasting funds on their profligate expenditure programmes and the package of perks available to them is much higher than that available to the university teachers. Politicians would eventually be punished for their wasteful expenditures by voters, but if university teachers continue to struggle for a share of expenditures enjoyed by politicians through prolonged strikes, it would be a never ending struggle and the same system of university education that they are claimed to be protecting would be at a risk of being destroyed as it would create more incentives for parents not to send their children to state universities, a trend which has already commenced.
In the preparation of the budget, expenditures are pruned, forcing relevant authorities to economize resources and on the financing side, a certain amount of funds are expected every year through improvements to tax administration. There of course could be further scope for improving tax administration. Under the tax reforms, one of the expectations was that it would improve the tax compliance while widening the tax base which does not seem to have materialized appreciably. Nevertheless, an allocation of funds raised through an elimination of waste and improvements to tax administration entirely for education may not be fair by all the other competing purposes for which funds are required. One may equally, suggest to use that funds to reduce the budget deficit as it would benefit everyone in the society through improved price stability and higher growth in economic activities.

There of course is a potential for raising government revenue by improving the performances of state corporations and commercial enterprises. However, despite many attempts, they continue to be a burden on the government, incurring losses rather than paying dividends to the government, entirely due to the resistance of these institutions to change i.e. to implement necessary reforms. It indeed is just like the university education system where any change to improve the system is resisted by both the students and lectures.

Towards a better university education system
There is no doubt that the education sector, in particular universities needs substantial developments which require a large volume of funds. However, if universities were to wait for the government to accommodate the entire volume of the resource requirement, those developments are unlikely to be realized. While the government would find it extremely difficult to accommodate rising demands for funds by universities, the required developments may not necessarily take place, even if funds were provided by the government. Under   the present system, as funds are made available to universities without any condition on the quality and the delivery of their services, there is not an inherent incentive for such developments. If the availability of funds are conditional upon the quality of the output of the universities i.e. quality of graduates and research which of course is judged by potential employers and users of research, there would definitely be a vast improvement in the universities as otherwise, they would not have resources. Accordingly, there is an urgent need for changing the present mode of operations of the university system and universities should be required to earn at least a part of their resource requirements. Universities are sitting on a huge human resource base which could be harnessed to produce marketable products, namely, quality research and graduates of the highest standards demanded by growing needs of the growing economy. Even at present, universities are conducting postgraduate degree programmes which are funded by fees collected from candidates. It would be a step forward in the right direction to extent this practice to undergraduate degree programmes too.

The FUTA is campaigning to protect the state education which is considered “free” education. However, the reality is that it is not free at all, but paid by the tax payers. The entire nation pays for the free education. This is in sharp contrast to private education where the payment is only by those receiving the education. Hence, in this case, candidates have the right and incentive to demand a quality education. If universities were to raise on their own a potion of their funding requirements by way of charging students, it is very likely that not only the universities would deliver good quality education, but students will also work hard in order to gain the maximum benefits for the money they paid and there would be no incentive for prolonged strikes.

Universal primary education is a MDG, the achievement of which should be ensured by the government. The public support for secondary education is also justified as an educated population would have benefits not only to the recipients, but also to the nation as a whole. Further, parents may not necessarily be keen on sending their children to school unless their education is supported by the government. However, in the case of higher education at university level which is aspired by relatively a limited number of students who have the capacity to complete a rigorous degree programme, public support may not necessarily be justified. A quality degree would enhance the earning capacity of the student and there should be schemes for students to raise funds for their education on the basis of their future higher earning capacity. While encouraging the financial institutions to develop such schemes, the government could also provide fee support schemes for needy students rather than providing funds direct to the universities. At the same time, If universities are offering high quality degree programs, just like in other countries with good education systems, the business community is likely to provide scholarships to selected students to complete their degree programme, with a view to employing them in their own establishments on the completion of the degree.

This indeed is the right time to seek and examine alternative means of developing the university education system rather than to protect, by infusing more and more public funds, an outdated and inefficient system under the guise of “free education”.
[The author is a former Deputy Governor of the Central Bank of Sri Lanka. The views expressed in the article are his own and do not necessarily reflect the views of the institution to which he was attached. His e-mail address is wije50@gmail.com ]

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Is higher allocation of funds for education, a viable demand?

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