There are 250 million children around the world who either don’t go to school, or attend school but aren’t learning anything. When we talk about paying to fix that problem, we tend to talk about aid. But with better policies and the right kind of help, poor countries could be contributing a lot more themselves. Above all, we need to get serious about tax.
How realistic is it to expect poorer countries to find more money for education? A new policy paper from the Education for All Global Monitoring Report shows that not only could low and middle income countries step up their efforts, but that doing so could raise an extra $153 billion for education spending in 2015. That’s how much governments in 67 low and middle income countries could be making available by next year if they increased their tax-raising efforts modestly and devoted a fifth of their budget to education. These reforms are realistic because sustained economic growth has increased the resource base that many poorer countries can rely on domestically to finance their education strategies. Many countries furthest from the Education for All goals, however, do not sufficiently tap their tax base.
To guarantee their citizens’ right to education and use education’s power to transform lives, it is vital that countries put in place strong fiscal policies, backed by budget policy reforms to allocate an adequate share of public spending to education and promote equity in its distribution. Our new policy paper focuses principally on the measures necessary to increase tax revenues so that these targets can be met.
One guide to how well countries tap their tax base is the ratio of tax to gross domestic product. It is estimated that countries need to raise 20% of their GDP in taxes to achieve the Millennium Development Goals (MDGs). Few low and middle income countries manage to mobilize domestic resources on this scale, however. Among those that do, many do not allocate a sufficient proportion to education. Of the 67 countries for which data are available, only 7 raise 20% of GDP in tax and devote 20% of spending to education. Namibia, which raises 24% of its GDP in taxes and allocates 22% of its government budget to education, shows that such goals are attainable. 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, the structure of the global economy is different today and new technologies make it easier to build the foundations of a long-term tax development strategy and accelerate growth in tax revenue. What are the concrete measures that governments can take to raise more tax revenue? Our policy paper highlights three: reducing tax exemptions, tackling tax evasion and diversifying the tax base. While low and middle income countries as a group rely heavily on tax revenue 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. Some individuals and companies avoid taxes legally by moving money to tax havens. The Tax Justice Network estimates that between US$21 trillion and US$32 trillion is hidden by rich individuals in more than 80 tax havens. Taxing capital gains on this wealth at 30%, would generate revenue of between US$190 billion and US$280 billion a year. If 20% of this revenue were allocated to education, it would add between US$38 billion and US$56 billion to funding for the sector. While domestic political will needs to be the main force behind tax reform and increased allocations to education, donors can play an important complementary role.
Between 2002 and 2011, just 1% of total aid was directed to public financial management and less than 0.1% of total aid supported tax programmes. Yet by one estimate, every US$1 of aid to strengthen tax regimes could generate up to US$350 in tax revenue. International partners also need to build a stronger multilateral tax transparency regime to tackle tax evasion and unethical aspects of tax avoidance. African finance ministers gathering this week in Abuja, Nigeria, have an opportunity to tap the vast potential offered by better-functioning tax systems. So do global leaders meeting in Mexico in mid-April for the first high-level meeting of the Global Partnership for Effective Development Co-operation. 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.
Manos joined the UNESCO in August 2011 from Oxford Policy Management, a development policy consultancy. He has worked as a monitoring and evaluation expert in education sector projects including: a public expenditure tracking and service delivery survey of secondary education provision in Bangladesh; the evaluation of a basic education project in the western provinces of China; the mid-term evaluation of the Education For All Fast Track Initiative; the annual reporting of progress in the implementation of the Second Primary Education Development Project in Bangladesh; a basic education capacity building programme in six states in Nigeria; the evaluation of an in-service, cluster-based teacher training programme in Pakistan; and the country study of the Out of School Children Global Initiative in Indonesia. He holds a BA in International Economics from the Athens University of Economics and Business and an MSc in Development Economics from the University of Oxford. His DPhil was a study of technical education and the labour market in Egypt, completed at the Centre for the Study of African Economies of the University of Oxford.