Wednesday, August 22, 2012

The way to allocate 6% of GDP for education


by Milton Rajaratne

Federation of University Teachers Association (FUTA), among its demands, proposes that the Government should adopt a policy to annually spend an amount equivalent to 6 percent of Gross Domestic Product (GDP). The Minister of Higher Education has rejected this demand reiterating that the government revenue is insufficient to bear such expenditure. The writer intends to explain the magic figure of '6 percent' and to explore the ways to raise additional funds to meet this demand.

The idea of '6 percent of GDP for education' was advocated by the government itself in compliance with the United Nations Millennium Development Goals (MDG) framework. The governments that endorsed the Millennium Development Goals are abode by the responsibility to achieve them by the year 2015. Sri Lanka eagerly endorsed the Goals and by which means pledged the UNESCO that the government would spend an amount equivalent to 6 percent of GDP on education to elevate the state of education to higher standards as those of the developed nations.

Furthermore, the Mahinda Chinthanaya policy document of 2005 and 2010 guaranteed intense development of education and through which transforming the country into a 'Global Knowledge Hub' as the ultimate goal was foreseen. In fact, the education restructuring projects proposed by the Mahinda Chinthanaya would unquestionably require a vast amount of additional funds. Thus, UNESCO and Mahinda Chinthanaya together uphold the need for increased expenditure on education.

The Minister of Higher Education, however, totally rejects that the government can spend any more money on education pointing out that the public revenue is insufficient to afford to such spending. He further argues that the public revenue is 14.3 percent of GDP (in 2011) and thus 6 percent is too big a chunk for a single sector as education and if spent such an amount the other sectors would run into problems of lack of funds. Therefore, he says, the present expenditure of 1.8 percent of GDP for education cannot be further increased. This notion of the Minister raises a few issues; his unawareness of the MDG and the government's pledge of 6 percent spending on education, ignorance of the relevant sections of the Mahinda Chinthanaya policy document, inability to obtain additional funds from the Treasury to uphold the projects proposed by the Mahinda Chinthanaya policy framework, lack of respect for the Mahinda Chinthanaya policy, unawareness of the fact that public expenditure is not solely born to public revenue and misperception of the role of education in the process of development.

In 2011, government revenue was equivalent to 14.3 percent of GDP but its expenditure stood at 21.4 percent of GDP. In turn, the amount spent on general and higher education was 1.8 percent of GDP. The private consumption expenditure on education was so insignificant and stood at 0.1 percent of GDP. Thus both public and private expenditure on education remained at 1.9 percent of the GDP which was misread by the Minister as above 5 percent of GDP. In the budget allocations for the year 2012, among 55 ministries, General Education was prioritized at the 12th place with an allocation of Rs. 33 billion and Higher Education at the 14th place with an allocation of Rs. 24 billion.

Source: Annual Report 2011, Central Bank of Sri Lanka.

However, in 1948, still during the English colonial period, with a large number of private schools, few universities and very low per capita income of US$120, the government spent 3 percent of GDP on education. The amount increased gradually and hovered at 4 percent in 1960 and reached its peak, i.e., 5.2 percent in 1972, a period of many difficulties when economic growth rate and per capita income remained at 3.2 percent and US$ 220 respectively. In contrast, today, the expenditure on education has reached its lowest, i.e., 1.8 percent of GDP during the last six decades while economic growth rate has reached its highest at 8.3 percent and the per capita income has surpassed US$ 2800.

Education spending in the recent past shows a sharp downturn from 2.7 percent of GDP in 2006 to 1.8 percent of GDP in 2011. This downturn coincides with the fall of public expenditure from 24.2 percent of GDP in 2006 to 21.4 percent of GDP in 2011. This explains that the contraction of public expenditure has directly and adversely impacted on the spending on education. Expenditure cut against education alone has compensated more than one third of the total expenditure cut during that period (i.e. 0.9 percent out of 2.8 percent). The fall in public expenditure reflects the fall in public revenue too.

Total public revenue has continued to fall from almost 25 percent in 1956 to 14.3 percent of GDP in 2011. The direct tax revenue has fallen to 2.4 percent of GDP in 2011 from 3 percent in 2007. Similarly the indirect tax revenue has fallen to 10 percent in 2011 from almost 12 percent of GDP in 2006. Similarly, the total tax revenue has fallen to 12.4 per cent of GDP in 2011 from 14.6 percent in 2006. This contrasts with the total tax revenue of 16 percent and 19 percent in 1997 and 1990 respectively. During the last several years tax rates were generally increased and tax base was expanded but the tax revenue in all respects has fallen as a direct effect of failure in tax collection. And that the government has adopted a practice of account adjustments through reducing expenditure in public services such as education in line with fall of tax revenue.

Source: Annual Reports, Central Bank of Sri Lanka.

It is a concern why tax revenue is falling sharply at a time of high economic growth and per capita income. Theoretically, economic growth brings about expansion in direct tax revenue as additional amounts of taxes can be collected on the growing personal and corporate incomes. Similarly, indirect tax revenue would also rise in line with growing consumption spending. Even without additional taxes being imposed, this confirms that total tax revenue would rise when the economy continues to grow. But it is a dilemma that Sri Lanka's tax revenue has been falling with the rapidly growing economy in the recent years. In modern laissez-faire economy of Hong Kong, government's tax revenues rapidly increased along with the economic growth but at a very low tax rate and a narrow tax base.

Source: Annual Reports, Central Bank of Sri Lanka.

Thus the loss of tax revenues can be identified as the symptom of tax collection ailment. Ailing tax collection helps siphoning off taxable income and in consequence the government becomes poor whereas a few people become rich. Sri Lanka is a case of a few rich people and a poor government. While the rich class finds ways to escape from income tax payments, the poor general public pays indirect consumption tax which is a sizeable ratio of their income.

At present, the share of indirect tax revenue of the government is 81 percent of total tax revenue which is an indicator that the poor general public pays more taxes while the rich pays less. If tax collection is systematized and made efficient, without any new taxes the government can increase its tax revenue. There were times that direct tax revenue of the government had reached 6 percent (in 1956) whereas total tax revenue had reached 24.2 percent (in 1978). If the present direct tax collections (2.4 percent of GDP) and the total tax collections (12.4 percent of GDP) are improved to those previous levels, additional funds can be easily allocated to education without levying new taxes.

Source: Annual Reports, Central Bank of Sri Lanka.

The FUTA demand of 6 percent of GDP for education requires additional funds. Efficient tax collection mechanism can earn additional revenues to the government which then could be diverted to education. Here, we attempt to workout simple arithmetic and show how the FUTA demand of 6 percent of GDP can be fulfilled without additional tax burden to the public. The GDP of Sri Lanka in 2011 is Rs. 6,543 billion and government expenditure on education is Rs. 121 billion, which is an equivalent of 1.8 percent of GDP. Public revenue is Rs. 958 billion, an equivalent to 14.3 percent of GDP. FUTA demands the government to allocate more funds on education and to reach 6 percent level after a few years. To meet the 6 percent, the government must find Rs. 272 billion worth additional funds. Elimination of widely known wasteful expenditure of the government is one way to save money for this purpose. Another way is to reprioritize public expenditure and redefine education as an investment and to bring it forth in the budget allocations.

Third option is to improve tax collections without levying additional taxes. If the third option is taken (as the government is not serious about the first two options), additional Rs. 272 billion is needed to be raised through improved tax collection. If the tax department increased its collection rate (not the tax rate) by 4.2 percent of GDP and spent the same on education, the FUTA demand can immediately be met. At present the tax revenue is 12.4 percent of GDP. When the 4.2 percent additional tax requirement is added to it, the required collection rate will increase to an equivalent of 16.6 of GDP. If the tax collection was as efficient as that of 1996 when the tax collection rate was 16.9 percent of GDP, the government could more than meet the FUTA demand without levying additional taxes. If the government wanted some time to distribute the additional expenditure on education, for instance, over four year period, then the requirement of additional tax collection would be only one percent annually to meet the 4.2 percent requirement. This one percent additional tax revenue matches grossly the tax collection of the year 2008 when the total tax collection rate stood at 13.3 percent of GDP.

When problems and promises turn to bother the government, the usual strategy of it is to blame a third party and to postpone or ignore the problem instead of finding practical solutions. Even if education is not in the government's priority list, it is in the priority list of the state. Thus when a problem arises in education, the government must look at it from the state's point of view and find solutions. Above mentioned arithmetic calculation would be a sure solution for the problem if the government is serious enough to listen to the demand of the state represented by the FUTA. Education expenditure is regarded as an investment in the human capital. Developed human capital is needed in all socioeconomic spheres: in hospitals as doctors and nurses etc; in universities as professors and researchers etc; in workplace as managers, engineers and skilled works etc; in laboratories as chemists and physicist etc; in parliament as educated lawmakers and ministers etc; in factories as technologies, machineries, new materials and processes etc; in the society as advanced goods and services, harmony, peace and ethics etc.

Developed human capital in turn creates additional incomes to the economy through inventions, innovations, efficiency improvement, employability improvement, foreign remittances etc. Therefore, the government ought to realize that the internal rate of return or the earning on investment is much higher in education compared to many other economic activities. Education is the key input of every economic activity and it brings about efficiency, productivity and effectiveness that are indispensable for economic and social progress. Higher spending on education helps achieve faster socioeconomic progress. Above calculation shows the way. What is more important is the government's will.

(Writer is Professor of Management at University of Peradeniya)

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