Opinion:

Is FUTA’s demand of 6% of the GDP on education reasonable?

By Dr. Lalithasiri GUNARUWAN

I write with reference to the discussion at the last AFTA-CU meeting on the FUTA demand and the subsequent circulations made by AFTA requesting me to express my views. At the very outset, may I say that there is no disagreement on the importance of protecting and further developing the public education system, and the necessity to prevent any pruning of funds in real terms made available to public education?

I only disagree with the demand that a fixed percentage (six percent or any other amount) of GDP be spent on education through the Government budget, and that be agreed upon through an MoU signed between the Trade Union and the Government. My inability to agree with the subject demand is owing to three main reasons : (a) Illogical nature of the demand, (b) Inappropriateness, and (c) Irrelevance. May I briefly present these three dimensions:

Illogical nature of demand

When a public expenditure is to be tagged, the realistic method is to base it on the total Government revenue or expenditure, and not on the Gross Domestic Product. This is because the GDP accounts for both public and private sectors, while the Government expenditure is exclusively concerning the State sector. If an expenditure percentage of GDP is referred to, such should rationally be by the economy as a whole, and not by the Government alone.

This would amount to only 15 percent of the total Government budget by then, and 85 percent of the budget would be left to be spent on other important sectors. (See graphs)

The same six percent ratio of GDP applied today would mean nearly a quarter of the total Government expenditure (or over one-third of the total Government revenue) having to be allocated for education.

When this trend continues (cannot avoid it as long as the private sector’s value added grows faster than that of the State sector), the share of the Government Budget in the economy would further reduce.

At a total Government budget to GDP ratio of 10 percent (which would not be unrealistic in the years to come), for example, spending six percent of GDP would mean 60 percent of the Government budget, and thus, the Government will have to withdraw from many other strategically important sectors.

The above graphs clearly indicate that, in spite of the gradual reduction of the size of the Government as a component of the economy, successive governments of Sri Lanka have improved the percentage spent on education from its total expenditure, from around six percent in the late 1970s to nearly 10 percent 30 years later, though with intermittent ups and downs, which could be explained by various situational and strategic parameters, such as terrorism, Mahaweli or other infrastructural drives.

Incidentally, in the post-1977 period, the highest ever ratio spent on education as a share of the total Government budget has been 11 percent (in 1992, 1994, 1999, 2005, 2006, 2007), and the lowest has been six percent (in 1978, 1980, 1984).

However, the same six percent demand today would mean over 25 percent of the Government budget, which is more than double the highest share of the budget ever spent on education in post-1977 Sri Lanka.

The illogical nature of the demand for a persistent fixed percentage (even 3% or 4% for that matter, let alone 6%) from GDP as public expenditure on any sector should therefore become clear.

It cannot be conceived that this simple arithmetic is not understood by eminent academics in different professions, particularly in engineering, mathematics and economics.

Inappropriateness

As explained above, the Government will have to withdraw from many other sectors, or will have to expand deficits, if increasingly larger shares from the Government budget (owing to a targeted percentage of GDP) are to be spent on education.

Both are sub-optimal and harmful for the national interest in the long run.Once the governments of the developing world are trapped in a fiscal impasse (on the one hand budget deficit ceilings; and minimum expenditure requirements on social sectors, on the other), and forced to withdraw from vital infrastructure development projects and offer those activities for the private sector, commercial opportunities are created for the companies of the developed world which are increasingly faced with drying out of business opportunities in their own countries.

This is a “win-win” game for these powers behind international organisations, and we should not get ourselves caught up in this trap.If the Government is to avoid both these undesirable scenarios, the only way would be to increase Government tax revenue.

Already facing a heavy tax burden (over 87 percent of the Government revenue is sourced through taxation and about 15 percent of the GDP is taxed), further taxation would divert otherwise investible resources in ventures of high growth potential into public spending. This will inevitably kill the growth impetus, and be harmful in the long run.Countries from time to time select sectors/activities for greater focus through public funding.

There was a time in history where the government prioritised health and education, resulting in improved levels of human development, which was achieved at the expense of a number of other sectors.

In some other periods, we prioritised agriculture and spent heavily on irrigation, enabling a resurgence of paddy production and human settlement development. In the 80s, the priority was Mahaweli development, including hydro power generation, if not for which, the country today would have been in greater economic, social and developmental darkness. These days we appear to be spending on infrastructure, an area which was long neglected.

The Government should have the required fiscal flexibility to face such different conjunctures and strategise for the future, and therefore, imposing fixed percentages of GDP, compelling the Government to increase the share of its budget on any specific sector all the time, is restraining that very vital flexibility the Government should possess.

We have managed to eradicate the 30- year LTTE terrorism through enormous resource diversions towards the military machinery. Such would not have been possible had the Government not had the required fiscal flexibility to divert resources depending on the needs of the time. Attempting to tie the hands of the Government would amount to nothing but constraining the country’s capability of focusing on such nationally important priorities that may emerge from time to time.

Even if one assumes that demands for targeted fiscal expenditure shares on specific sectors as logical, the apparent attempt to get them implemented through trade union (strike) action is inappropriate.

An MoU of that nature on one particular sector would serve as a precedence for “strong” trade unions in other vital sectors of the economy (ex. health, transport, power and water) also to launch trade union action asking for a minimum share of GDP from the Government budget for their sectors as well.

Such a scenario could, at the limit of it, make the aggregate demands for the pie more than its size and even if not, could make the annual budget preparation a mere “computer worksheet” exercise as the budget would then be governed by the shares specified in MoUs rather than by fiscal responses to the needs of the hour.

Therefore, not only Government expenditure as a percentage of GDP on education (or to any sector), sought through strike action is illogical, but also inappropriate.

Irrelevant

Even with regard to finances, gradually reducing the allocation of resources per student enrolled in State sector education and higher education institutes, the inefficiencies in prioritisation and spending of allocated resources, and the inability of producing the maximum academic and research value that could be generated through monies voted, can be observed as relevant issues calling for attention.

As such, chasing public allocation of a fixed percentage of GDP on education appears to me a missed focus.

A significant share of voted funds is annually returned unspent (nearly five percent in 2010).

There may be various reasons for this, and some may be unavoidable. In such a context, an increased allocation up to six percent of the GDP becomes irrelevant when, even at less than two percent of the GDP currently voted, a portion is returned unspent.

Though inter-country comparisons are made and circulated to show that countries spend larger shares of their GDP on education through public funds, the relevance of such indicators for comparison purposes needs further verification.

This is because, different countries define education differently, and manage public spending on education with different administrative structures.

In Sri Lanka, for example, technical colleges, training schools, vocational education institutes, and even some Universities (eg.-Kotelawala Defence University and Vocational Education University are Gazetted under ministries other than the Education or Higher Education Ministry.

Many Pirivenas and Dhamma education establishments are either voluntarily operated (do not belong to the Ministries of Education and Higher Education) or part-funded by the Government under different votes.

This might be unique to Sri Lanka, and it may be worth examining whether international statistics on education expenditure have captured these aspects.

It isn’t clear as to whether the Government expenditure on education channelled through Provincial Councils (for provincial Government schools), the Ministry of Trade (Mahapola scholarship), the Ministry of Transport (Sisuseriya bus service, 90 percent subsidy on school season tickets in SLTB buses, concessionary season tickets on trains) are included in the published data on Sri Lanka’s Government expenditure on education, and how such services are accounted for in the countries with which Sri Lanka’s education expenditure data is compared.

Appraised

The adequacy or inadequacy of education expenditure through Sri Lanka’s Government budget will have to be appraised, paying due consideration to these parameters that may be found in different countries under differing contexts.

A blind comparison with no regard to such possible differences in structural features would not only be irrelevant, but also meaningless.

In my opinion, FUTA’s demand should have focused on requesting the Government not to permit the deterioration of the real value of Government funds annually allocated per student enrolled. That would have been a justifiable and economically defendable argument, unlike the demand for six percent of GDP.

It may be argued that reduced waste, corruption and unprioritised spending in the public sector could save the required resources to allocate the extra percentages required for a particular cause.

Though such waste or corruption need to be eradicated or at least minimised at any cost, no such saving could be claimed by any single sector given the current situation that nearly 90 percent of the Government revenue (excluding grants and borrowings) has to be spent on the repayment of already obtained loans and their interest. Any economies that could be made in such respect should better be utilised to ease the debt burden of the economy.

Fiscal policy is a much broader issue that spreads beyond the horizons of a single sector of an economy.

The impact on other sectors of a decision made pertaining to a particular sector will invariably be very significant. Addressing these issues should involve scrupulous planning and futuristic decision making on monetary and fiscal policies, with proper understanding of multi-dimensional intricacies pertaining to economic forces in action.

Economic decisions unfortunately are not with absolute degrees of freedom where one could manipulate all possible variables independently.

When one parameter is fixed through policy, many others are automatically fixed by the economic forces themselves.

Therefore, proper understanding of the economic relationships are essential in dealing with monetary and fiscal policy issues, and it is our duty to let the professionals have the freedom and flexibility to exercise due diligence, without fixing them in policy traps.

Having said that, it is understood that there are overarching socio-economic policies within which the fiscal planners should operate.

Such policy directions are determined through a democratic process where political debates could be very useful and instrumental.

Therefore, issues that are politically relevant should better be left for determination on the political platform, and trade union strike action is not the stage on which such policy disputes should be resolved.

Suggestion

I therefore earnestly request AFTA-CU as well as FUTA to re-formulate this demand for six percent of the GDP as Government expenditure on education, and substitute it with a target where resources would be voted not less than what corresponds to maintaining the per student share in real terms of Government funds on education.

Alternatively, if FUTA wishes to continue with a percentage target on education expenditure, it would be less irrational to call for an overall expenditure share (both from the State and the private sectors) tagged to GDP; or, in case the expenditure by the Government alone is to be targeted, to ask a share of the total Government expenditure instead of asking for a share of the GDP.

Based on these facts, as economist, I am unable to go along with the demand for six percent of the GDP as Government expenditure on education put forward by FUTA in the ongoing trade union action.