External Debt, Fiscal Consolidation, and Government Expenditure on Education

To face a debt crisis, countries often implement various forms of fiscal consolidationpolicies aiming at addressing fiscal imbalances. This paper investigates how debt and fiscal consolidation couldinfluence government expenditure on education. It shows that increased external debt is associated with a higher risk offiscal consolidation, which may contribute to a decline in education expenditure. A 1 percent increase in external debtis associated with a 1.4 percent decline in education spending per school-age child. Given the rising debt levelsfueled by the COVID-19 response policies, a decline in education expenditure is to be expected in the post-pandemicera. For instance, in low- and middle-income countries, a 5 percent increase in the external debt could lead to a $12.8billion decline in the volume of education expenditure, all things being equal. This decline is almost equivalent to thevolume of official development assistance to the education sector in 2021. The paper sounds the alarm bell for thepotential impact of COVID-19-related debt on education financing.