On 1 November 2022, UK-based think tank the Resolution Foundation estimated that newly elected Prime Minister Rishi Sunak is facing a £40bn hole in the country’s public finances.
Just over two weeks ahead of the country’s Autumn Budget, the foundation warned that the figure is so high that cuts to public spending alone would not be enough and that tax rises are on the horizon too.
So far, the UK’s education sector has been spared the cuts that other sectors – such as the National Health Service – have suffered. However, the Institute for Fiscal Studies estimates that real-terms spending per student in the UK will be 3% below 2010 levels by 2024.
The UK is not alone in having to find a solution to fill a hole in its public finances. The Covid-19 pandemic has forced governments the world over to increase their public spending to contain the spread of the virus and face the widespread challenges that came with it.
More recently, rising cost of living and energy prices have also put pressure on governments’ budgets, paving the way for an era of rising interest rates, cuts to public spending and tax rises.
The education gap between poor and rich countries is widening
The education sector is already suffering from the post-pandemic tightening of public spending. According to a recent joint report by the World Bank and Unesco Education Finance Watch, two-thirds of low and lower-middle-income countries have cut their public education budgets since the onset of the Covid-19 pandemic. One-third of upper-middle and high-income countries have reduced their budgets too.
“These budget cuts have been relatively small thus far, but there is a danger that future cuts will be larger, as the pandemic continues to take its economic toll, and fiscal positions worsen,” says the report. “These differing trends imply a significant widening of the already large spending disparities seen between low- and high-income countries.”
The education spending gap between low and high-income countries was already significant before the pandemic. The report highlights that in 2018 and 2019, high-income countries were spending annually the equivalent of $8,501 for every child or youth’s education, compared with $48 in low-income countries.
“Although access to education has improved, the learning poverty rate – the proportion of 10-year-olds unable to read a short, age-appropriate text – was 53% in low- and middle-income countries prior to Covid-19, compared with only 9% for high-income countries,” the report states. “Covid-19 related school closures are likely to increase this 53% share to as much as 63%,” it adds.
The National Center for Education Statistics released a study in 2018 highlighting a connection between a country’s wealth and its education expenditure.
This study used material from the OECD to compare countries’ expenditures on education using two measures: expenditures on public and private education institutions per full-time-equivalent (FTE) student and total government and private expenditures on education institutions as a percentage of gross domestic product (GDP).
“A country’s wealth, defined as GDP per capita, is positively associated with its education expenditures per FTE student at the elementary/secondary and post-secondary levels,” the report said.
“In 2018, of the 16 countries with a GDP per capita greater than the $46,800 average of OECD countries, 15 countries had elementary/secondary education expenditures per FTE student that were higher than the average of OECD countries.
“These 15 countries were France, the UK, Canada, Finland, Australia, Belgium, Sweden, Germany, Denmark, Austria, Norway, the Netherlands, Iceland, the US and Luxembourg. The exception was Ireland, which had lower elementary/secondary expenditures per FTE student ($10,000) than the average of OECD countries,” it concluded.
FDI and education expenditure
A good education system is more likely to produce the talent pool that multinational companies are looking for when they go through their foreign direct investment (FDI) site-selection process.
Cuts to government spending in this sector are likely to have an impact on countries’ FDI attractiveness, although this is more likely to happen in the long term.
Investment Monitor’s data team has analysed the OECD countries’ education expenditure as a proportion of GDP in relation to the number of new FDI projects attracted by each country in the period between 2019 and 2021.
According to the World Bank’s database, Japan is the OECD country that spends the least – 3.1% of GDP – on education, followed by Ireland with 3.4%. They are both interesting examples, as compared with other low-spending countries such as Greece (3.6%) and Luxembourg (3.7%), they managed to attract a significantly higher number of FDI projects – a respective 994 and 1,025 versus 202 and 110.
Canada emerged as the country with the highest education expenditure as a percentage of GDP in 2018 – 9.9% – and also the highest number of FDI projects in the following two years – 1,421 – of the top ten OECD countries analysed.
Norway, Sweden and Iceland all came joint-second with a 7.6% education expenditure. While they all attracted significantly lower levels of FDI compared with Canada – 448, 430 and 28 – they attracted double or four times the projects of bottom countries such as Greece and Luxembourg.
FDI flows are highly unlikely to be influenced by a single driver, as many factors contribute to a company’s choice for its next FDI location. However, the chart above shows how the top three countries for FDI projects in the period from 2019 to 2021 all have an education expenditure of around or above 5% of GDP: the US (4.9% and 5,161 projects), Germany (5% and 4,529 projects) and the UK (5.2% and 3,194 projects).
Education is a very important FDI driver and continued cuts to this sector are not likely to be good news for the countries trying to attract more foreign investment in the long term.