Thursday 02/04/2020

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Education and innovation, key sustainability pillars

Responsible Investment Strategist

A country’s sustainability is also in the hands of the future generation and how it assumes future growth. By investing in today’s skills, we ensure that people participate not just in the future economy, but also in the financing of future public spending.

Here too, there are major differences between the various OECD member states. The 2008 financial and economic crisis has had severe consequences on the most impacted countries, which were obliged to cut education spending following drastic budgetary reductions.

Many arguments

And yet, States have many reasons to invest in the education of their population, as better skills contribute to:

  • Higher wages and better individual job prospects;
  • Higher productivity and earnings for companies;
  • Higher fiscal revenues for governments.

Enhancing the level of skills of the population leads to a decrease of non-employment levels and can even increase health standards. A recent OECD study has shown that public education expenditure is largely compensated by higher fiscal revenues. Hence, for every euro governments invest in education, they receive more than one euro back in the form of higher personal income taxes.

However, the increases in skills resulting from additional State expenditure differ considerably among those States and the measures they have adopted. As a result, tax cuts and training credits would seem to be less efficient than loans, scholarships or direct expenditure.[1] For countries with a low return on investment regarding skills, it is possible that the expected fiscal revenues do not cover the additional expenses on tertiary education. And this is especially true if public expenditure is already high.

Government expenditure on education: return on investment

Source: DPAM, OECD.

We are talking here about the return on investment for governments following additional fiscal revenues vis-à-vis education costs (direct costs, programmes of assistance, etc.). For countries like the Netherlands and Portugal for example, the estimated revenues are more than double the cost of investment. On the one hand, this can be explained by fairly low expenditure in relative terms, and on the other by a proportionally higher premium on the labour market for tertiary education.

In our sustainability model, we look beyond investments and expenditure, and we also pay great attention to the outcome of these investments, such as the education level acquired by the generations. This education level is key for determining employment rates. Therefore, it also has an impact on the future growth of the States.

Youth unemployment rate (25-34 years) vis-à-vis education levels

Source: OCDE, DPAM.

A lack of investment in education by a State is short-sighted, because States jeopardise their future by hampering the economic participation of their population, productivity growth, and future fiscal revenues. In consequence, future economic growth suffers.

[1] Taxation and Skills - OECD