Education systems need to raise sufficient revenues to ensure that, if used efficiently, students may reach appropriate learning goals at each education level. In general, countries raise revenues for education through three broad sources: international, public and private. A big challenge for many countries is raising sufficient revenues to expand enrollment while maintaining, or even raising, school quality. While increasing efficiency in the use of resources is necessary, countries are looking also to additional funding sources such as subnational levels of government and the private sector, including households. The sources of funding and the mechanisms through which revenues are raised have implications for adequacy, sustainability, and equity in education finance. To understand how education systems generate revenues for learning, it is useful to address the following questions:
1. Where do revenues for education expenditure come from?
Across countries, governments raise much of the funding for public education through broad based taxes such as those on value added, income or property, or taxes on specific types of transactions or activities.. However, the amount of revenues that governments raise depends on a variety of factors, notably national fiscal capacities. In low‐income countries where tax collection effort is often low and inconsistent, and in crisis or post‐crisis situations where state capacity is limited, the means for domestic education financing is limited and reliance on international aid is crucial (Inter‐Agency Network for Education in Emergencies 2008). Similarly, school fees or direct household payments are prevalent in primary and secondary schools around the world. While school fees may provide a much‐needed source of revenues for the education system, in many low‐income countries they represent a disproportionate burden on the poor (Jimenez and Lockheed 1996; Jimenez and Paqueo 1996; Bentaouet Kattan 2006).
2. How are resources generated for the public share of education revenue? Increasingly, countries are decentralizing the responsibility for raising and managing education resources to subnational levels of government. However, without central government‐led equalization schemes to compensate for varying fiscal capacity across jurisdictions, fiscal decentralization can lead to wide disparities in resources available for learning. How governments manage the allocation of funds for education is central to several important policy debates, in particular fiscal decentralization. Revenue generation capacity as well as the authority for 18 allocating funding for education across government levels varies substantially across and within countries. Requiring local governments to raise all their own revenue for education is likely to result in an unacceptably high degree of inequality in per‐pupil spending. In general, where local governments finance education from their own‐source revenues, central and state governments have introduced
intergovernmental grants to help mitigate spending inequalities between and across levels of government. Additional determining factors in education finance include which types of expenditures (current, capital, salaries) local governments are required to fund, the sources of ownsource revenue for local governments, and the extent to which local governments have revenue‐generating capacity for the education sector. Not only is it useful to understand the extent to which local governments have legal authority to raise funds for education, but also whether they are encouraged and empowered to do so.
3. What revenue sources are schools authorized to use or prohibited from using? By choice or necessity, schools often complement funding received from higher levels by raising revenue to meet locally informed needs such as extra‐curricular activities or classroom materials. Potential sanctioned revenue sources include registration and annual fees, PTA or community contributions, rentals, or advertisements. Due to concerns about equity, some of these revenue sources may be prohibited, as the ability to contribute outside funds can vary greatly within and across communities.
4. Is there a policy related to school fees? If so, what is it? Households are a source of domestic funding for education through user fees – which include not only formal tuition fees but also payments for textbooks, materials, uniforms, and other inputs needed for children and youth to attend school. Even where primary school tuition fees have been eliminated, parents often still report paying tuition (Transparency International 2009). Indeed, household education expenses can constitute a large share of total household spending, particularly for the poor. Fees may preclude the poorest and girls in particular from attending school. This exclusion may contribute to the intergenerational transmission of poverty that access to basic education is intended to reduce (Bentaouet Kattan 2006). While eliminating school fees is appealing because of its detrimental impact on poor households and therefore access to education of the most disadvantaged, there may be unintended consequences from the elimination of school fees.
One such consequence is that the increases in enrollment as a result of the elimination of school fees, in the absence of alternate sources of funding, can lead to drastic declines in school quality (Fiske and Ladd 2008). School fee abolition may also reduce school accountability to households, which may generate further declines in school quality (World Bank 2004; UNICEF 2009). Increased enrollment at the primary level creates more demand for secondary school and 19 therefore increases the salience of fee policies at the secondary level, especially if secondary school completion has become a more important distinguishing factor in labor markets. The equity impact of fee policies are also influenced by the proportion of total private spending on education that is represented by school fees or which authorities are responsible for establishing or collecting the fees.
5. Does a stabilization fund exist for education?
Stabilization funds allow governments to control revenue instability and maintain social programs during a downturn. These funds are more likely to be used effectively with stringent deposit and withdrawal rules (Gonzalez and Paqueo 2003). For example, some states choose to dedicate a portion of natural resource revenues to stabilization funds.