Will Brehm 2:15
David Archer, welcome to FreshEd.

David Archer 2:17
Thank you. Good to be here.

Will Brehm 2:19
So, I want to talk today about tax and education finance. And to start, I’d like to think about how poor and middle-income countries even finance their education systems?

David Archer 2:30
Well, I mean, the answer is that the vast majority of financing for public education systems in most countries comes from the domestic tax base of the country. And although I think the Education Commission in 2016 talked about how 97% of funding for education needed to come from domestic resource mobilization, and only 3% would come through increased mobilization of aid and loans, for example, in practice, the world tends to spend over 90% of its attention on aid and ignores the crucial points of what we can do to increase domestic resource mobilization. So, there’s a complete inversion of attention here.

Will Brehm 3:10
Right. So, this Education Commission, they are saying that it should be 97% funded by domestic taxes, and 3% from aid. But what is the actual figure? Do we know?

David Archer 3:24
So, of course it’s very difficult to get a simple global thing. But if you look at aid to education, it’s a much smaller percentage of the contribution to financing in low-income countries compared to the amount of money that comes in aid to health or to agriculture. Education is absolutely, I think it’s something like 87% of education financing comes from domestic resources. And that’s principally because the biggest cost is teachers and governments are very reluctant to employ new teachers based on short term, unpredictable aid.

Will Brehm 4:04
So, when we think about sort of general benchmarks for education finance globally, what are some of the norms that we talk about, or should be thinking about in education?

David Archer 4:15
Absolutely. Well, I mean, the one which people perhaps refer to most of all is that governments ought to be spending 20% of their national budgets on education. That’s something which was raised initially by the Education for All – Fast Track Initiative. It was referenced in the Jomtien Education for All conference, reinforced in Dakar in 2000, and is referenced again in the Incheon Framework for Action in 2015. And in Incheon, it was that about a range of 15 to 20% of national budgets should be spent on education. The worry that I have is that 15 to 20% of a very small pie is a very small amount. And generally speaking, people have paid very little attention, in the education community, to the size of the pie overall. And if we’re serious about addressing the resource gaps in financing of education, we need to pay more attention to the size of the pie. And that is determined more than anything else by the size of the domestic tax base of the country. So, we need to be looking not just at the share of the budget going to education but the size of the government budget as a whole. And of course, there are other critical things to think about. We need to think about the sensitivity of the allocation of the education budget, ideally driven by equity concerns. We need to look at the scrutiny of that budget to make sure that money arrives in practice in the most excluded communities. And that’s why we talk about these Four S’s as being absolutely crucial indicators for education financing, you look at the share of the budget, 20% going to education, the size of the government budget overall, the sensitivity of the allocation driven by equity, and the scrutiny to make sure the money arrives in practice. You need to look at the interdependency of all of those four, if you’re going to get serious about addressing financing.

Will Brehm 6:04
And earlier you mentioned something about the resource gap in education. How big is this? What are we talking about here?

David Archer 6:10
This again … So, in many cases with the Education Commission, we’re talking about hundreds of billions of dollars, even trillions in the longer term. But the global attention tends to focus on the $39 billion, which is estimated to be the external resource gap, even after domestic financing has been factored in. But actually, that $39 billion takes for granted that there’ll be massive accelerating growth in domestic financing for education. And almost nobody is paying attention to what is being done to expand the domestic financing for education. And in fact, we’re finding that there are more and more constraints and contradictions, and governments are finding it more and more difficult to, in fact, expand domestic financing for education as a result of rising new debt crisis, as a result of IMF conditions that hold down public sector wage bills, and as a result of lack of ambition in supporting countries to expand their tax bases.

Will Brehm 7:07
So, this is quite a contradiction then, right? We have the need for more domestic financing to education, but domestic governments are being constrained in all sorts of ways by some of the very actors who are trying to promote development. I mean, that seems very contradictory.

David Archer 7:26
Yes. And I do think perhaps one of the biggest contradictions is that the education community engages with the Ministry of Education about developing education sector plans and trying to support their progress on education towards SDG 4, but the really big decisions about financing are based on ministries of finance, and the education community has almost no meaningful relationship with the Ministry of Finance. In fact, the Ministry of Education is often unable to go and make coherent demands of the Ministry of Finance, the Ministry of Finance, and what it does in terms of investing in education is determined more than anything else, by its dialogue with the IMF and with the World Bank. And neither of those institutions when it comes to looking at the big financing picture is really thinking about education. They’re thinking macroeconomic stability in often a very sort of narrow and ideologically flamed way.

Will Brehm 8:21
Yeah. And how would you define that ideology?

David Archer 8:25
Well, I think we would instill the Washington Consensus as sort of neoliberal fundamentalism. We have actually recently conducted this sort of analysis of IMF policy conditions and advice across all low-income countries, cross sectional, low-and-middle income countries. And we find that although the IMF has now been putting up beautiful policy and research papers about all sorts of economic alternatives, when you look at what they’re doing in developing countries and the conditions and the advice that they’re giving, it’s pretty much unchanged from the days of the Structural Adjustment Programs of the 1980s, which have long since been discredited. And that means holding down spending on public services at a critical moment when governments are expected to expand spending in order to achieve the Sustainable Development Goals. Not just in education, in health, or water, and other sectors, you have the IMF coming in still saying, no, hang on, you’ve got to hold down your public sector wage bill, which is the biggest constraint of all. Because the biggest item in education budgets is teacher salaries. And we found in our latest research that in 80% of countries, the IMF was advising that public sector wage bills needed to be either frozen or reduced in 80% of countries. If you’re going to freeze or reduce your public situation and teachers are the single largest item on that wage bill, and doctors and nurses are the second largest group, then you’re simply not going to be able to employ the more teachers, doctors, nurses, the public sector workers you need to achieve the Sustainable Development Goals. So, we are seeing this gross contradiction between the aspirations of the international community to achieve Sustainable Development Goals and the policies that are still being pursued in practice by the IMF.

Will Brehm 10:04
It’s a bit schizophreniac, isn’t it?

David Archer 10:06
Just a little bit. And I think we see the World Bank coming in, in many cases as well, sort of saying, well if you can’t expand your public spending, then we have to find other solutions. And you end up with the support for PPPs, or privatization, or an assumption that the private sector is going to come in with resources, which is very rarely the case. In fact, it’s often more about the dismantling of the public education system and public accountability. And the private sector is very rarely putting in new resources. But this drive to privatization of education is closely correlated to the failure, the chronic underfunding of public education for a long time, and the continued pressure on domestic budgets to be held down.

Will Brehm 10:44
So, if we are to take this issue of tax seriously, and sort of overcome this ideology of the Washington Consensus, how should we be thinking about taxes? How should low- and middle-income countries really start taking taxes seriously? What should they be focused on?

David Archer 11:01
So, one of the sort of most useful indicators is the tax to GDP ratio of a country. You have everyone from UNCTAD to Thomas Piketty in ‘Capital in the Twenty-First Century’ say, at a bare minimum, countries need a 20% tax to GDP ratio. Otherwise, as Piketty calls them sort of “regalian states”, or states which play some sort of formal functional state but actually can’t deliver universal services. If you want to have a state that delivers universal services, you have to have a minimum 20% tax to GDP ratio. At the moment, an average tax to GDP ratio in low-income countries is 16%, in middle income countries is closer to 25, or 30%, in higher income countries it’s about 40%. And in the countries which have got really comprehensive, universal provision of services in the Scandinavian countries, it’s 45%. So, the biggest determinant of whether or not a country is able to provide services is the tax to GDP ratio. The average low-income countries 16%. But there are then serious outliers, like Nigeria and Pakistan, where the tax to GDP ratio is under 10%.

Will Brehm 12:04
Wow.

David Archer 12:04
And these are countries … Interestingly, Nigeria and Pakistan are the two countries that have got the most children out of school in the world between the two of them. And it’s surely connected to the fact that not only are they not spending enough on education as a share of the budget, they also have a very low tax base, which means in those two countries, if you got the tax to GDP ratio up to 20%, as a minimum level, and you increased the share of spending to education, you could actually triple or quadruple public spending on education. And that will be transformative obviously.

Will Brehm 12:38
And so, you could increase the size of the budget, and still give 20% to education recurrent expenditures, and you would see a massive growth?

David Archer 12:49
You’d have massive growth. Even in the countries … One of the interesting things in looking at in the Global Partnership for Education, or the Global Fund, which makes it a requirement to receive funds from GPE, that countries should work towards 20% of the national budget being spent on education. You’ve got a lot of countries who are spending 20% of the budget, but they still got major education challenges. And the main reason for that it’s 20% of a very small budget. They’ve got a very small tax to GDP ratio. So, the real interest of the education community is to stand alongside now the health community and other sectors to make the case for expanding the tax to GDP ratio because that’s what would be most transformative for expanding spending.

Will Brehm 13:31
Right. Rather than fighting with different sectors saying let’s improve all the sectors by getting a larger budget.

David Archer 13:36
It’s a real problem. I think we’ve seen a long time now that the education community, when it’s only fighting for an increase share of the budget, you start upsetting the health people, and the water people, and the agriculture people, and the transport people in the energy, you end up in this combative situation with other sectors, when actually as soon as you focus on tax and how you expand the tax to GDP ratio, there’s a massive common interest and you’re working together with those other sectors to say, what does it take to build a viable public sector as a whole. And in most cases, education is the biggest single beneficiary of that, because in many countries, 20% of the national budget is spent on education, which tends to be a higher proportion than is spent on other sectors. So, if you keep the same share, but expand the size of the budget everyone wins, and education wins in particular.

Will Brehm 14:25
Right. So, then how do countries, if they were to think about the share and the size of these budgets, how do they stay sensitive? What sort of ways is sensitivity then through government taxation policies? How can governments actually be sensitive to the equity issues that you were talking about earlier to make sure we don’t have regressive taxes for instance? Or that, the education budget is actually distributed correctly?

David Archer 14:53
Yeah. So, I think it’s interesting that you pick up on that point of sensitivity because it’s important to consider both the sensitivity allocation of the budget driven by equity, but also the sensitivity through which revenue is collected. How do you expand your tax base in the sensitive, progressive ways, which means that the poor pay less as a share of their income than the rich? The focus of a progressive tax reform should be that those who got more should pay more. And in practice, what we’re seeing is that the dominant form of expanding the tax base in low-income countries at the moment is through VAT, the value added tax. Now, this is problematic for a couple of reasons. First of all, in many cases, value added tax is sort of supported, and particularly advocated by the IMF as a way to expand tax. It’s a relatively easy way to expand your tax base, partly because it’s largely invisible, people are not aware of paying it. It’s the shopkeepers, people who are selling things that are having to effectively pay it and who are aware of it, but the consumers tend not to be.

Will Brehm 15:55
You just see the final, you see the final total.

David Archer 15:58
But the problem with it is it ends up being regressive. In fact, it probably is particularly bad for women who may be buying everyday items. So, it’s both gender aggressive, and regressive as a whole. The poor end up paying an unfair share. And the other problem with VAT is because it is invisible, people aren’t aware they’re being taxpayers. So, if you go to a remote village, in any country, in Africa, or Asia, and you talk about tax, people don’t think it’s relevant to them because they’re not aware of being taxpayers. And if they’re not aware of being taxpayers, they see the public services that they receive -whether it’s education or health, the locals- as some sort of charitable benevolent gift given by a local politician, rather than as their right, rather than as something that they’ve paid for through their taxes. And it’s incredibly transformative when we then build awareness, even in very remote villages that you are a taxpayer, you are paying tax. Every time you’re buying something, you are paying tax. And if you add up the amount that is being paid, in some rural villages -we did in Pakistan, we have a head teacher who calculated the total revenue that was being paid in his village by everybody through VAT and it came up to something like $250,000 a year. And then you compare that with the amount of spending on education, health, and say, we’re just not getting a fair share of services for this. So, once people’s ability to demand the right to public services should not be determined by whether they pay tax. It certainly enhances people’s competence to mobilize and demand services, if they are aware that they are taxpayers. Because why would you pay twice? Why would you have to pay user fees to access a service if you’ve already paid for it through your tax. So, there is a problem with VAT because it’s invisible. And it doesn’t help to build the accountability and people’s confidence. And yet, that is the main recommendation in many cases by the IMF. What we’re calling for is a much bigger focus on the biggest, richest international companies, multinational companies, wealthiest elite countries, looking at property and land taxes, or wealth taxes, and capital gains taxes, inheritance taxes, there’s a whole range of taxes that need to be put in place in order to build a fair tax system. What would normally be a progressive tax system as a foundation then for progressive spending on things like education and health.

Will Brehm 18:14
Yeah. Progressive taxation, it seems to be, one of the biggest challenges that it faces is that it requires a larger contribution from people who are in power, people who are making the rules on taxation, and who use ideas like new public management to justify the idea of a value added tax, who justify cutting taxes to corporations and the wealthy so they can be job creators as the discourse in America is. So, it seems like it’s a political question then, not simply a question of what’s the correct calculation for taxes. But it’s a deep, serious political question in each country.

David Archer 18:55
It is a serious political question. And this is why we need to build a much wider awareness about tax and why we need to demystify it and make it something where education advocates, health advocates, other public sector advocates, much wider swathes of society makes the case for tax reform. Because otherwise, you’re not going to be able to challenge the elites who are always going to be trying to pass on the cost of these to the most vulnerable, and in many cases, the poorest. Some of them have stung, the most shocking stuff is around the extent to which tax breaks are given away -tax holidays and tax incentives- to big multinational companies. So, the impression is given that, oh, well, if we don’t give these tax holidays and tax incentives to big companies, they won’t invest here. All of the research shows that when a multinational company makes a decision to invest in a particular country, they may have say 15 different criteria for where they’re going to invest. Getting a tax holiday might be number 13 or 14 on that list. It’s very low down their priorities, but they will always ask for it. And they always give the impression that they’re not going to invest if they don’t get it. And they always win that argument because it’s an unbalanced negotiation. But the truth is they’re going to invest in the country anyway. Harmful tax incentives, even what the IMF would define as harmful tax incentives, tax incentives that no country should give away amount to a loss to developing countries of $138 billion every year, that’s infinitely larger than the aid revenue that is ever given.  $138 billion lost every year. And in some countries, it’s astonishing the figures involved. So, in Pakistan, $4 billion is given away every year in what the IMF would deem harmful tax incentives to attract multinationals to invest in the country. Money that should not be given away. The IMF say you really should keep that in the country. And that $4 billion, if even just 20% of that was spent on education, fair shared good education. That’s enough to get every single child out of school in Pakistan into school and employ 100,000 more teachers. It is transformative the level of money that is just willfully given away and I think there’s a very close connection with corruption as well, because sometimes, these tax incentives are given away to multinational companies in exchange for a little bit of a backhand, or to some powerful politician, or somebody who’s going to do a deal behind the scenes to enable them to get these tax breaks. So, it’s associated also with some pretty nefarious actors.

Will Brehm 21:14
And this is where the issue of scrutiny would come. You would not only scrutinize the national budgets and the spending, but also how the tax breaks -and almost the non-tax issues, or whatever it is, and how those are being or not being scrutinized at the multinational.

David Archer 21:32
Yeah, absolutely. I mean, you just need scrutiny. There should be no giving away of a tax incentive to any multinational company without at the very least parliamentary scrutiny. But in most cases, this is something which can be done without any sort of parliamentary oversight. And that’s really shocking. So, you certainly need a level of scrutiny. The IMF estimates that low-income countries can increase their tax to GDP ratio by 5% in the medium term, say within three to five years. We would argue that means if you’re sitting from here in 2000, by 2030, the date of the SDGs, that’s 10 years from now, most countries could expand their tax to GDP ratio by 10%. In the case, Nigeria, Pakistan, countries with very low tax to GDP ratio, that is a doubling of your tax base. And that’s transformative in terms of your capacity to spend on development. But in every country, an increase of the tax to GDP ratio for low-income countries average of 16%, to get up to 26%, starts to build the basis for providing universal services as a whole, and education in particular. And our argument would be that that growth in tax to GDP ratio can be done through progressive tax, food taxes, which are redistributive in themselves, so that you’re not just being sort of gender responsive and progressive how you spend your money, but also in how you collect the money. And that does mean some difficult challenges in holding wealthy elites, wealthy companies to account and that’s where citizen mobilization, increased awareness about tax, and where we need the education community to get together with the health and other public sectors to make the case for tax reform. At the moment, people don’t do that, because people see taxes some sort of a complex, technical, mystifying sort of thing, rather than something which is the absolute bedrock of any discussion of development. It should be the first thing that every single organization that is serious about development should be talking about. Okay, well, how do you build a state, which is a developmental state, one which can provide services -we’ve got to talk about tax, how are we going to do that? It should be the central concern of any aid agency. There should be an absolute focus on how do you expand, how can you strengthen national revenue authorities. And yet, there was a beautiful piece of research done by the Global Education Monitoring Report, a few years back now, which showed that for $1 spent in strengthened national revenue authorities in Africa, the increased revenue was about $350 sustainably in terms of revenue. So, you would think what every single a donor must surely be pouring their money into strengthening revenue authorities. Even from a sort of a conservative angle, this is the sustainability of aid. You no longer would have to give aid if you managed to build credible taxes now. How much money actually goes from the aid budgets globally to support revenue authorities in low-income countries? Naught point 1% of aid. So, you would say well, this is the key to building a sustainable development and only naught point 1% of present aid budget is being spent on doing that.

Will Brehm 24:39
So, why not? Why not? I mean, what’s the logic here that these development agencies are operating within? I mean, on the one hand, I start thinking, is it simply these agencies are stuck in the Cold War and the idea of redistribution is linked to socialism and that becomes like a scary word?

David Archer 24:57
Either that or they’re stuck in the colonial era and they still quite like dependency. The truth is, and I do find it more and more alarming that, in some ways, some of the powerful sort of Northern donor countries now have more influence over what’s happening in education, and health, and in social services than possibly they did in the colonial era. It’s astonishing! And so, there is a power thing. You want to perpetuate some level of dependency. You don’t really want countries to be able to determine for themselves what their policies are. You want to export your services from your country to these low-income countries, you want to tie your aid, you want to use aid as an entry point to advanced trade and security interest. You don’t necessarily genuinely want to support sustainable development. If you really were serious about it, you would put all of your energy into how you can strengthen the tax system.

Will Brehm 25:50
So, having a self-sufficient, sovereign nation is actually a threat geopolitically to certain nations.

David Archer 25:55
Yeah, that might be a factor. I sometimes grapple with why. Why would it just not make sense. We do see some donors improving their practice -NORAD in Norway a much, much better practice in terms of taking seriously tax reform as part of the sort of package of their aid support. There are some positive examples out there, we are making a very big push with the Global Partnership for Education to take this tax work seriously in the coming months so that it should build part of the new strategy. For me, that’s absolutely crucial, because the Global Partnership for Education has got all the bilaterals around the table, and the multilaterals, and it’s a space where if we can shift the understanding of what’s going to be most transformative for education financing, to include tax, then I think that’d be a big breakthrough.

Will Brehm 26:44
There’s another element of tax that I’ve been thinking about lately. And to be honest, I don’t really know how to understand it. And that is about these big multinational corporations, like UBS, for instance, or massive philanthropic organizations like the Chan Zuckerberg Foundation in America, and their involvement in education aid but somehow using the sort of the nonprofit tax loopholes to benefit themselves. And I don’t understand how that works, yet, but I’ve seen like UBS, for instance, they have this whole Impact Investment Fund, or whatever they call it, and I don’t understand the logic of why the donors they have -which are presumably, multi-billionaires from these different companies- would want to invest in education at all. I just don’t understand the logic behind it. And I think is it something to do with the tax break?

David Archer 27:43
Well, it’s very, very worrying that any organization, individual, foundation, trust, company that cares about education, if they are not paying fair taxes in the countries where they’re making a profit, and they’re not paying fair taxes, generally, I think that’s undermining progress on education. So, there’s a Global Business Coalition for Education, which has got a lot of very, very powerful, big international companies and they are all saying they really want to champion progress on education and help to achieve SDG 4. That’s great. My challenge to them is just first of all -you know, it’s lovely to have your support for education- first of all, prove to me that you’re paying fair taxes in the countries where you’re operating, because that’s the biggest single contribution you can make to progress on education. Just pay taxes and be transparent. Country by country reporting, because if you do that, that is what’s going to enable countries to make progress on education. So, you should be in the forefront of being champions of that. And I don’t see that coming through. Similar problem with many foundations. The trouble is that there is an industrial scale tax avoidance going on. We recently in Action Aid, or a few years back now actually did an analysis. We sort of got to join training workshops around where people at Barclays Bank, Standard Chartered Bank, about how do you invest in Africa?

Will Brehm 28:57
Oh my god.

David Archer 28:57
And put simply, they were training anybody who wanted to invest in Africa. Well, what you do is you set up a paper company in Mauritius because they’ve got a very low tax rate in Mauritius. And then you send a loan to your branch, say, in Mozambique, to invest in what you want to do in Mozambique, but you charge a very high interest rate on that loan, say 100 or 150% interest on that loan. So, any profits that you make in Mozambique have to pay back the loan first. So, you extract your profits from Mozambique into Mauritius. You pay very low tax on that in Mauritius, and that way you can invest in Africa and not pay tax. This is an industrial scale operation.

Will Brehm 29:39
So, this was at a conference, people were advocating it.

David Archer 29:41
This was a training workshop for how to actually invest in Africa.

Will Brehm 29:44
Oh my God!

David Archer 29:44
And this is the sort of thing that’s happening. One of my other favorite stories is the story we had about a large brewery in Ghana. And we had a woman who was selling the beer that was made in the brewery under a sort of straw-roofed shack outside the brewery to the people who work there. And we figured out that she paid more tax on the beer that she was selling to the workers than the entire brewery did and it’s the largest brewery in Accra. And then we figured out she paid more tax than the entire company did in Ghana and it’s the biggest brewery in Ghana. And then we figured out that she paid more tax than the entire company did in the whole of Africa. And it’s the biggest brewery in the whole of Africa -SABMiller, they make things like Grolsch. So, one woman is paying more tax and it’s that sense of injustice. We need to tell these stories in order to get people to say this is plain wrong. The people who are making the biggest profits, or who got the ability to pay, to contribute to national government need to be held to account and need to do so. Because otherwise, how are we going to progress sustainable financing for education?

Will Brehm 30:52
Well, David Archer, thank you so much for joining FreshEd. It really was a pleasure of talking today.

David Archer 30:56
Thank you very much. It’s been a pleasure to be here.

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