External Debt, Fiscal Consolidation, and Government Expenditure on Education

Elise Wendlassida Miningou

No 10475, Policy Research Working Paper Series from The World Bank

Abstract: To face a debt crisis, countries often implement various forms of fiscal consolidation policies aiming at addressing fiscal imbalances. This paper investigates how debt and fiscal consolidation could influence government expenditure on education. It shows that increased external debt is associated with a higher risk of fiscal consolidation, which may contribute to a decline in education expenditure. A 1 percent increase in external debt is associated with a 2.9 percent decline in education spending per school-age child. Given the rising debt levels fueled by the COVID-19 response policies, a decline in education expenditure is to be expected in the post-pandemic era. For instance, in low- and middle-income countries, a 5 percent increase in the external debt could lead to a $12.8 billion decline in the volume of education expenditure, all things being equal. This decline is almost equivalent to the volume of official development assistance to the education sector in 2021. The paper sounds the alarm bell for the potential impact of COVID-19-related debt on education financing.

Date: 2023-06-07
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