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nagarjunanwl
"It" in option D must be referring to Government but not to Government's spending ..so don't we have a wrong comparison here?
Also, all the part in question is underlined whereas in option A, " last year" is omitted..
If there is a mistake in the question, may please update the question.

Yes, 'it' correctly refers to the "Government" in option (D). The sentence is

D. Graduation rates in the US, lowest among the developed nations, are predicted to be higher this year than last since the government is spending about $100 more per student than it was {spending}

We have ellipsis here since 'spending' is repeated so doesn't need to be written again.

I am assuming that "last year" is not underlined in the original sentence.
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