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There is a strong case for investing in education. Education is not only a key driver of economic growth but also fosters productivity gains. It helps reduce poverty and mitigates inequality by promoting social mobility. A well-educated workforce is essential for countries to remain competitive in the global economy. Importantly, education generates significant spillover effects, improving health outcomes and fostering civic engagement.

Realizing these outcomes depends on the availability of fiscal space in the economy to fund social and developmental goals. Fiscal space gives governments the flexibility to increase spending on priority areas or reduce taxes without risking access to financial markets or compromising their ability to meet current and future payment obligations.

Several factors influence fiscal space, including a country’s revenue potential, the efficiency of resource utilization, future spending commitments (such as pensions and healthcare), and debt management practices. 

There are five key factors that have constrained higher spending on social sectors in low- and lower-middle-income countries.

1. Debt accumulation: In the 2000s, many low- and lower-middle-income countries benefited from debt relief initiatives that reduced their debt service obligations, allowing for increased spending on social sectors. However, over time, increased domestic and external borrowing has led to a resurgence of debt burdens. 
2. COVID-19: In response to the COVID-19 pandemic, these countries, like their advanced-economy counterparts, ramped up healthcare spending and implemented programs to protect lives and livelihoods. However, the resulting rise in budget deficits caused the debt-to-GDP ratio to climb. By 2022, some countries were paying three times the share of revenues in interest compared to advanced economies. For example, Ghana's interest payments constituted 46% of revenues and Malawi and Zambia exceeded 30%. 
3. Restricted access to international financial markets and a reduction in donor flows: In 2023, many low- and lower-middle-income countries, particularly in Sub-Saharan Africa, were effectively shut out of international financial markets, further constraining their liquidity. In 2022, these countries paid more to their creditors than they received in new financing. Securing debt relief has been a prolonged process, as evidenced by the experiences of Ghana and Zambia. Additionally, since 2022, donor support has increasingly been diverted to Ukraine and the outlook for future aid is uncertain, given fiscal pressure on donor countries and shifting geopolitical priorities.
4. Stagnation of tax revenues: From 2012 to 2020, tax revenue as a percentage of GDP stagnated in these countries. In some low-income countries, tax revenue is less than 10% of GDP—far below the IMF’s recommended threshold of 15% for supporting productive investments and sustaining growth.
5. Inefficiencies in public spending: Research reveals wide disparities in the efficiency of education spending across countries, suggesting that education outcomes could improve significantly without increasing current spending levels. Some countries spend 20-35% more on education than their more efficient peers yet fail to achieve better results. In sub-Saharan Africa, only 15% of students in primary and secondary schools meet minimum learning standards, and teacher training has declined over the last two decades. In Peru, the distribution of over 1 million laptops in recent years had no measurable impact on learning outcomes. 

So, what steps can low- and lower-middle-income countries, along with the international community, take to expand budgetary space for education? 

1. Enhancing tax collections: The IMF estimates that these countries could raise their tax-to-GDP ratios by a third to a half through tax system and institutional reforms. Key areas for revenue generation include broadening the value added tax base, and reforming taxes on personal and capital income.
2. Rationalizing public expenditure: Improving the quality of public services is essential for increasing tax compliance. Governments should prioritize reallocating resources to areas that can most improve education outcomes, addressing regional imbalances in teacher-student ratios, and improving the mix of spending between teacher salaries and non-wage inputs like teaching materials and teacher training. This approach would also help ensure parity across regions, directing education funding to low-income areas and reducing dropout rates.
3. Effective debt management: Maintaining a balanced approach to debt management is essential. These countries must manage short- and long-term debt maturities carefully, smooth out debt service schedules, and monitor interest rates to avoid excessive reliance on volatile international rates.
4. International support for financing: Several low- and lower-middle-income countries face large principal repayments on external debt in the coming months, posing temporary financing challenges, but their debt remains sustainable. For these countries, the international community must facilitate increased financing on reasonable terms. For countries requiring debt restructuring, the process should be expedited.
5. Designing temporary fiscal adjustment programs: Given the extent of fiscal imbalances in these countries, it is crucial to design temporary fiscal adjustment programs that protect essential spending on education and health required for achieving the SDGs.

In conclusion, while we know how to expand fiscal space for education, achieving it requires discipline and political will. Governments must act by utilizing the policy levers available to them.

Disclaimer: This blog section features insights and ideas from the SDG4 High-Level Steering Committee members and other education partners on transforming education and leading SDG 4. The opinions expressed are those of the authors alone.