Education financing and economic growth: an analysis of Uganda's public expenditure in education (1986-2023)

Abstract

Uganda’s economy has grown steadily at about 5 to 6% annually, but this progress has not translated into broad-based development. A key challenge lies in low public spending on education averaging only 2.5% of GDP, well below UNESCO’s 6% benchmark which has resulted in reduced learning outcomes and a weak human capital base. This study therefore examines how education expenditure influences economic growth in Uganda, alongside factors such as labor participation, gross capital formation, inflation, and government consumption, to provide evidence-based insights for more effective education financing and sustainable economic transformation. Using 38 cases of annual time series data from the World Bank development indicators from 1986 to 2023, the study models economic growth as a function of education expenditure, labor participation rate, inflation, gross capital formation and government final consumption expenditure. The Autoregressive Distributed Lag (ARDL) approach was employed, using the EViews statistical package, given the mixed stationarity of the variables, to capture both short- and long-run dynamics The results showed that GDP was stable while inflation was highly volatile. Education spending and investment were positively linked to growth, whereas government consumption and inflation had negative effects. Causality analysis indicated that education expenditure, inflation, and investment significantly influenced GDP. Mixed stationarity levels justified using the ARDL model, and the bounds test confirmed a long-run relationship among the variables. The long-run results reveal that education expenditure has a strong and statistically significant positive effect on Uganda’s economic growth (coefficient = 0.7091, p < 0.01), confirming that investment in human capital enhances productivity, innovation, and long-term development. Conversely, labor force participation shows a marginally significant negative effect (-0.086, p = 0.0512), reflecting structural inefficiencies such as underemployment and low productivity that limit its growth contribution. Inflation has a negative but insignificant impact (-0.0059, p = 0.1132), implying that inflation levels during the study period were moderate and did not substantially affect output. Similarly, gross capital formation, though positive (0.039), is insignificant (p = 0.2569), suggesting inefficiencies in investment allocation and weak linkages between capital spending and productive growth. Government consumption expenditure, however, exerts a significant negative effect (-0.108, p = 0.0004), indicating that a large share of public spending in Uganda is unproductive. In the short run, changes in education expenditure, inflation, and investment significantly affect GDP, often with lagged effects, highlighting the importance of policy consistency and efficiency to sustain growth momentum. The study shows that education spending is vital for Uganda’s long-term growth, while inefficiencies in labor, investment, and public spending hinder progress. To sustain growth, this study recommends that Uganda should invest strategically in quality education, strengthen labor skills through vocational and entrepreneurship programs, and improve investment efficiency by prioritizing high-impact projects. Maintaining macroeconomic stability and redirecting public expenditure toward productive sectors are as well essential, alongside continuous research to ensure policies remain effective and responsive to the country’s evolving economic needs.

Subject Keywords: Education financing; Economic growth; Uganda; Public expenditure; Education