How managing tax better could help fill the education finance gap

Better management of tax and prioritization of education in budgets could raise $153 billion for the sector in 2015, according to calculations in a new policy paper by the EFA Global Monitoring Report team.

Our new policy paper, ‘Increasing tax revenues to bridge the education financing gap’ shows that, if governments in low and middle income countries modestly increased their tax-raising efforts and devoted a fifth of their budget to education, they could fill over half of the annual funding gap for basic and lower secondary education.

Sustained economic growth in many of the world’s poorest countries has increased the resources that they can raise domestically to finance their education strategies. Many countries furthest from the Education for All goals, however, do not sufficiently tap their tax base and this economic growth, as a result, is not being fairly distributed. Currently only seven of 67 countries analysed for this policy paper generate 20% of GDP in taxes and allocate 20% of their budgets to education.14mar1

It is estimated that countries need to raise 20% of their GDP in taxes to achieve the Millennium Development Goals. At present, however, only seven out of the 67 countries analysed in our new paper reach the 20% threshold on both tax/GDP ratios and government spending on education. In addition, on current rates, only 4 of the 48 countries currently raising less than 20% of GDP in tax would reach the 20% threshold by 2015.

Raising domestic resources would bring dramatic improvements to the lives of millions of children by providing them with a quality education. Across the 67 countries analysed, even modest moves towards these targets would more than double the average spending per primary school age child.

Taxe

In some countries, the effect would be particularly strong. In Pakistan, tax revenue is just 10% of GDP and education receives only around 10% of government expenditure. If the government increased its tax revenue to 14% of GDP by 2015 and allocated one-fifth of this to education, it could raise sufficient funds to get all of its children and adolescents into school.

Aid to education will still be crucial for quite a while. Many of the world’s poorest countries cannot expect domestic taxes alone to provide the financing needed to meet the EFA goals in the near future. In some middle income countries, however, such as Egypt, India and the Philippines, there is far greater potential to mobilize domestic resources for education.

This is not to say that change can happen overnight. It took European economies a century to increase their tax revenue from 12% to 46% of GDP. However, with support from donors and the international community, many more developing countries could reap the benefits of a well-functioning taxation system. Doing so would allow them to support their education systems with domestic revenue instead of borrowing or relying on external finance.

While low and middle income countries as a group rely heavily on tax from corporations, many of them forgo considerable revenue from businesses by granting too many tax exemptions. In much of sub-Saharan Africa, these exemptions can amount to the equivalent of 5% of GDP.

Tax evasion is another scourge of poor countries that desperately need to raise more money. For many of these countries, tax evasion results in resources being used to build personal fortunes for the minority elite, rather than strong education systems for the benefit of the majority. The EFA GMR team has partnered with the international NGO, ActionAid, whose Tax Power campaign has exposed tax avoidance by big companies around the world.

Today’s paper shows that if the trillions of dollars estimated to be hidden away in tax havens was subject to capital gains tax, and 20% of the resulting income was allocated to education, up to US$56 billion in additional funds could be raised for the sector.

This week, finance ministers are meeting in Abuja to discuss how to find more finances to achieve their goals. In three weeks, global leaders are meeting in Mexico for the High Level Meeting of the Global Partnership for Effective Development Cooperation at which domestic finances are on the agenda. It is crucial that these leaders wake up to the vast potential held in better managed tax systems.

Our policy paper highlights three concrete measures that governments and leaders must take so that future generations can reap the rewards of current economic growth: reduce tax exemptions, tackle tax evasion and diversify the tax base. Such efforts would go a long way towards ensuring that children are in school and learning by 2015, and would provide a solid base for funding more ambitious goals after 2015.

This entry was posted in Developed countries, Developing countries, Economic growth, Equality, Equity, Finance, Governance, Out-of-school children, Post-2015 development framework, Post-secondary education, Poverty, Uncategorized and tagged , , , , , , , . Bookmark the permalink.

One Response to How managing tax better could help fill the education finance gap

  1. Tax revenue can only be increased by bolstering trust of the people in the Government. Trust can be built through honest, efficient, effective and transparent public spending.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s