Budget allocation and financial incentives

International benchmarks recommend that governments spend at least 15% of public expenditure and 4% of their gross domestic product (GDP) on education (GPE, 2019). Many education systems in developing countries fall short of these thresholds, and the outlook is not encouraging considering the growing youth populations and the COVID-19 crisis which has resulted in declining available revenues, aid, and household contributions (Al-Samarrai and Benveniste, 2021). Not spending on education per child remains too low in low-income countries, but recent increases in public education spending have had little impact on educational outcomes (Al-Samarrai and Benveniste, 2021). There is, therefore, an urgent need to mobilize more resources for education and, perhaps more importantly, to finance education more equitably and efficiently in order to improve the quality of learning.

Promising policy options

Mobilize additional resources for education through domestic sources

Increasing funds for education is indispensable if quality and access to education goals are to be met. It is estimated that low-income countries would need to double their total share of national income devoted to education to achieve goals similar to SDGs by 2030 (Al-Samarrai and Benveniste, 2021). Given the decreasing levels of aid to education and the need for sustainability, governments will need to mobilize domestic sources to generate additional funds for education. Many of them have the potential to increase their share of the budget allocated to education, for instance, by redirecting public funds from other sectors if they are used in a way that disproportionately benefits the rich and produces distortions in the economy (e.g., subsidies in energy) (Al-Samarrai and Benveniste, 2021). However, the weight of education in the national budget is ultimately the result of a decision-making process reflecting the priorities of the government; therefore, ministries of education will have to advocate for education among other national priorities knowing that it can benefit other policies for socioeconomic development (UNESCO and IIEP-UNESCO, 2012).

Increasing national revenues for education can also be achieved by widening the tax base, in particular by eliminating harmful taxes, fighting against tax evasion, and raising tax compliance (Al-Samarrai and Benveniste, 2021; GCE, Education International, and ActionAid, 2016). Another range of options concerns the diversification of sources, notably from the private sector. For example, allowing the private sector to finance tertiary education in SSA (e.g., through co-financing and co-management with the industry of vocational/technical training; provision of loan and scholarship programs) would enable to shift the limited public funds to priority areas (UIS, IIEP-UNESCO, and UNESCO-BREDA, 2011).However, greater private sector involvement needs to be carefully regulated with particular attention to preserving transparency and equity (UIS, IIEP-UNESCO, and UNESCO-BREDA, 2011).

Integrate policy, planning, and budgeting

Often, budgetary decisions diverge from the planning cycle because their respective preparation may involve different people, and the budget is often oriented towards a short-term perspective covering a one-year period as opposed to longer-term planning (UIS, IIEP-UNESCO, and UNESCO-BREDA, 2011; UNESCO and IIEP-UNESCO, 2012). Yet, the divergence between policy, budget, and planning is among the most important contributors to poor budgeting outcomes in developing countries (UNESCO and IIEP-UNESCO, 2012). In contrast, “integrated  policy,  planning,  and  budgeting  is  fundamentally  about  having  expenditure programmes that are driven by policy priorities and disciplined by budget realities” (UNESCO and IIEP-UNESCO, 2012: 115).

To establish the link between policy, planning, and budgeting, more and more countries have resorted to medium-term expenditure frameworks (MTEFs) to increase the predictability of funds and the criteria of funding decisions (UNESCO and IIEP-UNESCO, 2012). These frameworks “allow for a more efficient resource allocation aligned with the government’s goals, and they link the annual budget to multi-year policies”, besides serving as a tool for dialogue and consensus between the stakeholders involved (e.g., ministry of education, ministry of finance) (Buonomo Zapaleta, 2018; OECD and Asian Development Bank, 2019: 66).

MTEFs often come along with program-based budgeting, further reinforcing the link between planning and budgeting. Unlike traditional line-item budgeting, program-based budgeting allows testing the feasibility of different policy options and estimating the funds necessary for the selected policies. With this approach, policymakers can develop financial models that integrate all education sub-sectors to ensure coherence across them as well as cohesion across the different ministries involved (UIS, IIEP-UNESCO, and UNESCO-BREDA, 2011).

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Ensure efficient budget allocation

Beyond the availability of financial resources, perhaps a more important question is how they are used. Constraints on raising additional funds for education render the efficient use of the limited available funds even more critical. Due to differences in spending efficiency, two countries may reach different outcomes for a similar amount of spending per child. Two main factors account for inefficiencies: (i) the use of funds is not aligned with learning objectives and equity; (ii) funds are not allocated as intended or do not reach schools (Al-Samarrai and Benveniste, 2021).

Improving the efficiency of the use of funds requires that, in the first place, realistic educational goals are identified, trade-offs are made, and strategies are selected based on their financial feasibility and sustainability, considering the aims of the education sector and the needs of each educational level (Buonomo Zapaleta, 2018; Jourde, 2016). Secondly, as discussed above, the alignment between planning and budgeting should allow better consideration of learning in the budgeting process; this could be achieved by, for instance, using learning-related indicators for budgeting as done in education plans (Al-Samarrai and Benveniste, 2021). As the evidence base on policy and decision-making is growing, policymakers can draw on evaluations conducted on interventions aimed at improving learning to identify the strategies that will make the best use of funds (Al-Samarrai and Benveniste, 2021). Finally, to determine whether funds are used as intended and reach schools, Public Expenditure Tracking Surveys (PETs), which are audits of financial flows, are one of the tools that can be used to measure the efficiency of public expenditure and identify potential leakages (Poisson, 2016).

Ensure equitable budget allocation

Spending inefficiencies resulting from redirecting education funds to purposes other than the intended ones disproportionately affect disadvantaged children and households (Al-Samarrai and Benveniste, 2021). Efficiency and equity can go hand in hand and improving the efficiency of budget allocation can generate more equitable outcomes (Al-Samarrai and Benveniste, 2021). One straightforward way for budget allocation to play a redistributive role would be to allocate more funds to those facing disadvantages (GCE, Education International, and ActionAid, 2016).

In OECD countries, there are two approaches to do so: (i) providing additional funding through the main allocation mechanism, for instance, by including certain parameters (e.g., special needs, refugee/immigrant status, socioeconomic background) in the funding formula; (ii) providing targeting funding through other ways external to the main allocation mechanism (OECD, 2017). The experience of OECD countries suggests that, although the latter option allows better steering and monitoring of the funds, the multiplication of such targeted programs can become excessively complex and costly to handle. On the other hand, including equity-related parameters in the main allocation mechanism is comparatively simpler but requires adequate accountability to ensure the funds benefit the target groups as intended (OECD, 2017).

The Brazilian Fund for the Development of Primary Education and Appreciation of Teachers (FUNDEB) is an example of a successful program which redistributes tax revenues raised at the state, federal and municipality levels to guarantee a minimum level of spending per student in all municipalities. The program not only narrowed the spending gap across municipalities but also resulted in improved enrolment and learning achievement and narrowed achievement gaps in poorer municipalities (Al-Samarrai and Benveniste, 2021).

Determine appropriate modalities for allocation

The level at which funds are allocated has different implications. On the one hand, a high degree of decentralization of funding allocation means that the particular needs of schools may be better taken into account, but risks of inequities may arise across schools. On the other hand, a high degree of centralization is more likely to guarantee equal treatment of schools but makes considerations for equity more difficult (OECD, 2017). In the context of growing school autonomy, many countries have implemented school grants. These funds transferred from the central level directly to schools aim to reduce the bureaucratic burden, limit leakages, allow schools to use funds for self-improvement as needed, and more effectively reach disadvantaged schools, among other benefits (IIEP-UNESCO, 2014). The features of an effective school grant policy include, among other things, precise and realistic goals, a formula and amount aligned with these goals, consideration of disparities, a participative decision-making process, and provisions for control and monitoring (IIEP-UNESCO, 2018).

A number of decisions also need to be made regarding the modalities through which funds are allocated, and these are important to ensure resources are distributed where they can make the most difference. The allocation of funds to schools commonly follows a funding formula, an indicators-based rule that determines the amount to allocate. The simplest formula would consist of allocating the same amount per capita, but funding formulae have grown in complexity. For instance, a needs-based approach relies on an analysis of individual schools’ needs to attain a specified level of quality of education (Levačić and Ross, 1999). Although a more complex formula may better address the diversity of beneficiaries than a simpler per-capita approach, it requires a larger set of reliable data and capacities for monitoring and may be less transparent and understandable to the public (LE Wales, 2009; OECD, 2017). While there is no single best funding formula, it is important that certain principles are followed:

• “Aligning formulas with school system priorities and establishing evaluation criteria accordingly;
• Adequately reflecting different per student costs of providing education;
• Promoting budgetary discipline; and
• Ensuring the periodical review of formulas to assess the need for adjustments.” (OECD, 2017: 25)

It must be noted that the way funds reach schools introduces incentives for their behavior (Hanushek, 2007). For example, schools have no incentive to reduce expenditure and use the funds efficiently when the formula is rigid (e.g. on a historical basis), when an authority covers most of the school expenditure directly, or when schools cannot redirect funds between different expenditure items or carry over unused funds from one year to another (Glover and Levačić, 2020; OECD, 2017). By contrast, a per capita lump sum can be an incentive for greater efficiency (Levačić and Ross, 1999).

Promote accountability and transparency

Budget transparency is fundamental to any mechanism of accountability and participation in budget allocation. At a country level, access to information on government budgets and allocations is often limited; yet public oversight helps evaluate whether resources have been used efficiently and equitably and fight against corruption. Open budgeting offers this possibility: it refers to “public access to budgetary information and processes related to education, with the opportunity for citizens to participate in the budgetary cycle” (Poisson, 2021: 1). Measures that facilitate transparency and accountability include the full disclosure of budget information on time to allow stakeholders to influence debates (GCE, Education International, and ActionAid, 2016), the definition of clear lines of responsibilities and the creation of independent audit mechanisms (UNESCO, 2017). At the school level, structures such as management committees and parent associations must be operational and have defined roles and capacities to oversee the use of funds (How can we oversee the use of school grants?, 2017; OECD, 2017).

Build strong information systems and capacities

Budget allocation must rely on strong information systems that link policy with outcomes rather than solely focus on inputs (Al-Samarrai and Benveniste, 2021; UNESCO and IIEP-UNESCO, 2012). Such systems should allow assessing the cost-effectiveness of the possible strategies to achieve education goals, monitoring the use of funds, and measuring the impact of education investments (Al-Samarrai and Benveniste, 2021; Buonomo Zapaleta, 2016; UNESCO and IIEP-UNESCO, 2012). This requires collecting, processing, and utilizing comprehensive and credible data on education finance at all levels (including household expenditure and private provision of education services), student achievement, as well as research findings (UIS, IIEP-UNESCO, and UNESCO-BREDA, 2011). This, in turn, requires developing adequate capacities in budgeting, financial management, and performance reporting (Buonomo Zapaleta, 2016).

Other policy options

Consider the introduction of financial incentives with caution

Incentives are a special case of resource allocation (Plecki et al., 2006). Financial incentives encompass a wide set of measures aiming at influencing behaviors and preferences, often with the objective of improving the efficiency and equity of the education system. For instance, these can be used to address challenges such as teacher absenteeism or lack of qualifications or promote student attendance.

Performance indicators have been increasingly used in budget allocations as a means to establish a direct link between the budget and the outcomes, motivate recipients to pursue their objectives, and instill a culture of monitoring and evaluation throughout the system (UNESCO, 2017). Such an approach attributing rewards (or sanctions) to the delivery of desired outcomes has been implemented at different levels of both the supply side (government, service providers, teachers) and the demand side (parents, students) (UNESCO, 2017). This includes, among a variety of interventions, conditional cash transfers or programs granting teacher bonuses based on student results (Crehan, 2016; Masino and Niño-Zarazúa, 2015). However, evidence of their success is mixed.

While performance-based allocation mechanisms or “payment by results” have the potential to foster efficiency, accountability, and educational improvement, they also entail many potential unintended effects. Some of these effects include narrowing complex issues to imperfect indicators, exacerbating existing disparities, producing risk-avoiding behaviors (e.g., teaching to the test), and augmenting the unpredictability of fund flows (OECD, 2017; UNESCO, 2017).

Financial incentives should be introduced cautiously, considering the other factors at play. Evidence suggests that incentives need complementary policies to be successful (Masino and Niño-Zarazúa, 2015). For instance, cash transfers may be effective in relieving low-income families of the opportunity cost of education, but they are of little value if children do not have any education opportunities. Similarly, incentives can be used to foster teachers’ motivation, but the expected actions and results must be within their capacity (World Bank, 2018). Additionally, incentives do not need to be monetary or high-stakes to be effective. In Mexico, Punjab, and Pakistan, providing parents with information on the school’s relative performance has improved learning outcomes (World Bank, 2018).