The 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 per cent 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 [...]

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Need for additional spending in undisputed, priority the key

By Prof. Milton Rajaratne
6% allocation for education in the budget
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The 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 per cent 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 per cent’ 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 Education for All (EFA) framework. Sri Lanka eagerly endorsed the framework and by which means pledged to 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.

Protest march by university lecturers

The Minister of Higher Education, however, totally rejects that the government can spend more money on education pointing out that the public revenue is insufficient to afford such spending. He further argues that the public revenue is 14.3 per cent of GDP (in 2011) and thus 6 per cent is too big a chunk for a single sector as education and if spending such an amount the other sectors would run into problems of lack of funds. Therefore, he says, the present expenditure of 1.8 per cent 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 per cent 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, dishonoring the Mahinda Chinthanaya policy, unawareness of the fact that public expenditure is not solely borne from public revenue and misperception of the role of education in the process of development. In 2011, government revenue was equivalent to 14.3 per cent of GDP but its expenditure stood at 21.4 per cent of GDP. In turn, the amount spent on general and higher education was 1.8 per cent of GDP. The private consumption expenditure on education was so insignificant and stood at 0.1 per cent of GDP. Thus the both public and private expenditure on education remained at 1.9 per cent of GDP which was misread by the Minister as above 5 per cent 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.

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

Education spending in the recent past shows a sharp downturn from 2.7 per cent of GDP in 2006 to 1.8 per cent of GDP in 2011. This downturn coincides with the fall of public expenditure from 24.2 per cent of GDP in 2006 to 21.4 per cent of GDP in 2011. This explains that the contraction of public expenditure has directly and adversely impacted on the spending on education. Expenditure cuts against education alone has compensated more than one third of the total expenditure cut during that period (i.e. 0.9 per cent out of 2.8 per cent). The fall in public expenditure reflects the fall in public revenue too. Total public revenue has continued to fall from almost 25 per cent in 1956 to 14.3 per cent of GDP in 2011. The direct tax revenue has fallen to 2.4 per cent of GDP in 2011 from 3 per cent in 2007. Similarly the indirect tax revenue has fallen to 10 per cent in 2011 from almost 12 per cent of GDP in 2006. Similarly, the total tax revenue has fallen to 12.4 per cent of GDP in 2011 from 14.6 per cent in 2006. This contrasts with the total tax revenue of 16 per cent and 19 per cent in 1997 and 1990 respectively. During the last several years tax rates were generally increased and the tax base was expanded but the tax revenue in all respects has fallen as a direct effect of failure in tax collection.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.

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 the 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.

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 per cent 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 per cent (in 1956) whereas total tax revenue had reached 24.2 per cent (in 1978). If the present direct tax collections (2.4 per cent of GDP) and the total tax collections (12.4 per cent of GDP) are improved to those previous levels, additional funds can be easily allocated to education without levying new taxes. The FUTA demand of 6 per cent 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 work out simple arithmetic and show how the FUTA demand of 6 per cent 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 per cent of GDP. Public revenue is Rs. 958 billion, an equivalent to 14.3 per cent of GDP. FUTA demands the government to allocate more funds on education and to reach 6 per cent level after a few years. To meet the 6 per cent, 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 per cent of GDP and spent the same on education, the FUTA demand can immediately be met. At present the tax revenue is 12.4 per cent of GDP. When the 4.2 per cent additional tax requirement is added to it, the required collection rate will increase to an equivalent of 16.6 per cent 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 a four year period, then the requirement of additional tax collection would be only one per cent annually to meet the 4.2 per cent requirement. This one per cent additional tax revenue matches grossly the tax collection of the year 2008 when the total tax collection rate stood at 13.3 per cent 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. The 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 socio-economic 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 physicists, 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 return 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. Thus higher spending on education is crucial in achieving faster and sustainable socio-economic progress in the long run. The need for increased education spending is undisputed. But what is disputed at present is the priority given to it.

(Writer is Professor of Management at the University of Peradeniya)




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