Budget 2017/18: Birmingham goes for Emerson 2.0

Birmingham goes for Emerson 2.0 – Trading off higher education spending for schools

Voters will be forgiven for thinking the Federal 2017 budget looked more ALP than LNP as the ghosts of Labor budgets past have been conjured up. The Gonski needs-based schools funding appeared dead after the Coalition’s 2014 budget, but like the good Lord it has been resurrected again three budgets later – now as ‘Gonski 2.0’. Savings to fund Gonski over the next four years have been found in higher education, a strategy hauntingly reminiscent of the Labor Government and then Minister Craig Emerson in 2013.

The budget context

In 2013 Craig Emerson as Tertiary Education Minister announced a 2 per cent efficiency dividend on universities recurrent teaching funding – the Commonwealth Grant Scheme (CGS) – which, alongside changing a student start-up scholarship into a loan, equated to $2.3 billion of savings. Yet for Emerson and the Gillard Government, the cuts were carried out for the best of causes: to help fund needs based schools funding policy. Alongside the new National Disabilities Insurance Scheme (NDIS) Gonski was a large expenditure commitment which put further pressure on a deteriorating Government budget.

Yet over the last decade revenue has not kept pace with spending, leaving what the boffins at the Parliamentary Budget Office (PBO) call a ‘structural budget deficit’ . Where controlling for cyclical fluctuation reveals recurrent government expenditure exceeds recurrent revenue. The revenue gap was in part due to the lower price of iron ore and coal and the end of the construction phase of the mining boom which dampened company tax receipts. The big factor though was the long-term erosion in the income tax base caused by large income tax cuts handed out by John Howard and Kevin Rudd. According to the PBO, these tax cuts account for two-thirds of the reduction in revenue between 2002-03 and 2011-12. Yet Labor also neglected to make the necessary but difficult decisions to increase the revenue base after the ‘salad days’ of high iron ore prices were over.

When the Coalition came back into power their 2014 budget strategy was to declare a budget emergency, cut public spending, and deny insufficient revenue was even an issue. As we all know, this resulted in perhaps the most scorned budget in living history. After a few years in the wilderness with an intransigent Senate and a leadership change, the Coalition has both toned down the rhetoric of ‘deficit and debt disasters’. More surprisingly, they have tentatively embraced the social spending of Labor, and have consolidated the NDIS putting forward a viable funding plan for Gonski 2.0. At the same time, it is still a political aspiration of both major parties to bring the budget back into surplus. The 2017 budget engages in substantial revenue raising measures, most notably the levy on big banks.

The budget papers reveal the $2.8 billion cut to higher education as the single biggest savings measure for the Government, and not far off the extra money assigned to Gonski 2.0 over the next four years. It is perhaps not surprising that, as Michael Sercombe has argued, cutting higher education funding is politically safe for the Coalition with only 22.6 per cent of Australians under 30 with bachelor degrees voting for the Coalition in the 2016 election. There are certainly other areas the Government could have looked to for savings. Some include; abandoning the commitment to cut corporate tax, as well as plugging up tax expenditures such as negative gearing, the 50 per cent capital gains tax discount, and superannuation tax concessions. Yet the Government remains committed to the corporate tax cuts, and are keenly aware at the electoral damage removing tax expenditures would cause them. Simon Birmingham, the Minister responsible for both schools and universities, has both had to find savings and find a way to fund Gonski 2.0. In doing so, he has engaged in a budget strategy we will call ‘Emerson 2.0’.

Emerson 2.0

Universities, students, and graduates have been called on to help offset some of the new funding towards Gonski 2.0, which adds $2.2 billion more to schools funding compared to the 2016 budget. The case for university cuts is assisted by a recent Deloitte report that was commissioned by the Government. The report found that university teaching costs per student in most university disciplines were less than the sum of the Commonwealth and student contribution that the universities received in revenue. As a result, universities have been dealt out a 2.5 per cent cut to their base funding in each of 2018 and 2019, and the Government will concurrently also reduce tuition subsidies for students by 7.5 per cent over the next four years. Alongside other measures, this will save the Government budget about $2.8 billion over the next four years in underlying cash terms.

The Government will allow universities to make up part of this reduction in the CGS with a gradual 1.8 per cent per annum rise in the maximum student contribution universities can charge students, amounting to a 7.5 per cent rise overall by 2021. The fee increase will see students paying between $700 and $3,900 more for their degrees by 2021. Holders of HELP debt will also begin repaying earlier, with a new repayment threshold to be set at $42,000, and crucially a lower starting rate of 1 per cent. For a graduate earning just above $42,000, this amounts to about a $400 annual repayment. Crucially, the indexation of the threshold will be changed from average weekly earnings (AWE) to the consumer price index (CPI).

The Government has consolidated support for the demand driven system, which has been under fire over the last few years amidst problems of worsening student retention, completion, and graduate underemployment. Demand driven funding will be extended to approved diploma, advanced diploma, and associate degree courses. The opaque system of postgraduate Commonwealth Supported Places (CSP) allocation, which favours the Group of Eight institutions, will be replaced by a student centred voucher system which allows students to take their voucher to any university of their choice.

The Higher Education Participation and Partnership Program (HEPPP), designed to build aspiration for higher education among disadvantaged students to improve their university outcomes, will be reformed and importantly enshrined in legislation. Alongside the efficiency dividend, the Government will quarantine 7.5 per cent of each university’s base funding to be put into a performance based funding pool, beginning in 2018. By 2019 a set of so far undecided performance benchmarks will help determine how much cash each university will be able to draw from the pool.

Efficiency dividends can hurt efficiency and performance funding can hurt performance

The best thing that can be said about the efficiency dividend to university base funding is that it really could have been worse. This budget officially abandons the so-called ‘zombie measures’ from the 2014 budget, which would have seen a 20 per cent cut alongside uncapped fees which the universities could use to make up the Commonwealth shortfall. Relative to 2014 this cut is smaller, and the sector can absorb some of the cut through the full fee international and postgraduate student market. The international student market has improved solidly after a slump in 2011. International enrolments are now growing faster than domestic, and international tuition fees made up nearly a fifth of total revenue for the sector in 2015.

Figure 1: Net operating balance for Australian universities in 2015

Figure 1: Net Operating Balance for Universities in 2015
Notes: This includes a number of one-off payments, and so overstates the extent to which recurrent revenue contributes to the net operating balance. Once these one-off payments have been accounted for more universities would be in deficit. Sources: Higher Education Finance, 2015

Figure 1 shows the net operating balance for universities in 2015. A significant few universities that struggle to attract international and postgraduate students already have budgetary issues, and the cuts will really hurt. They are likely to result in cutting academic and student support programs, which will ultimately affect the student experience. The cuts may also threaten the long-term financial health of universities. For instance, in their most recent audit of the sector in Victoria, the Victorian Auditor-General’s Office advised that, despite strong revenue growth, university investment in buildings and equipment was not keeping pace with the rate that current stock was depreciating.

The cuts also come just as the National Tertiary Education Union (NTEU) has entered the next round of enterprise bargaining with university administrations. The NTEU began the round aiming for a 15 per cent pay rise over the next four years, but the immanent cut to university budgets alongside slow wage growth across the economy puts a great constraint on their claims.

It is likely that the cut will be a catalyst for further staff cuts across the sector, and aggravate a trend towards the greater casualisation of the academic workforce. Since 2012 in full-time equivalent terms, the share of academic casual staff as a proportion of all academic staff has continued to rise, from 21 per cent in 2011 to 23 per cent in 2015. In full-time equivalent terms, between 2012 and 2015 an additional 1,759 casuals are now employed compared to just 1,260 extra full-time and fractional full-time academics. Casual staff are cheaper, and they can be hired and fired more easily. This helps universities manage volatile student demand, as well as uncertainty around Government funding. University balance sheets reflect this, with academic staff costs as a proportion of total expenditure continually declining since the introduction of the demand driven scheme, from 29.7 per cent in 2012, to 28.7 per cent in 2015.

The performance funding measures are yet to be developed, but caution is required. Performance funding can be counterproductive if incentives are not properly aligned to the real outcomes policy makers seek to achieve (see Goodhart’s Law). Performance funding may also be punitive to universities that may have poor student outcomes, through no fault of their own. Regional universities, universities which serve greater proportions of disadvantaged groups, or universities in areas experiencing poor economic times, will have very different natural performance benchmarks based on their unique missions. If these factors aren’t taken into account, performance funding is likely to be a Procrustean bed – cutting the funding out from universities that most need them. Furthermore, it is not obvious as to why future members of a university community – students, academics, and administrators – should be funded according to the performance of their predecessors. It is a good sign the Government has flagged both a long consultation period and a more tailored approach to devising performance benchmarks. Still, in the worst case scenario after combining the efficiency dividend and the loss of performance funding, some universities could lose up to 10 per cent of their recurrent funding over the next few years.

Higher student contributions are fair

In his budget reply speech, Bill Shorten rejected the Government’s fee increase measures declaring that, ‘a university is an opportunity you earn – not a privilege you inherit’. Yes, quite. Yet the data shows the opposite tends to prevail – universities are still predominantly occupied by the beneficiaries of inherited privilege. Since 1989 the proportion of low SES students attending university has remained the same at around 15 per cent, although the move to a demand driven system in 2012 led to an increase that has persisted. In the first half of 2016, only 16.6 per cent of all higher education students were from low SES postcodes.

While nobody likes to have to pay more for university, there is little evidence that higher fees would deter disadvantaged students. Despite fee hikes both in the United Kingdom, and here in 2005, the proportion of low SES students continues to grow. One reason higher fees have little effect on disadvantaged students has to do with the nature of the student loan scheme, which removes any up-front cost to studying, and protect loan holders against downside risk. HELP loans are income contingent, meaning repayments are only required above a certain income threshold.

Another reason is that, even if the Government completely removed the tuition subsidy and replaced it with student contributions, a university degree would likely still have substantial net financial and non-financial benefits. Compared to someone who has only finished Year 12, the median male graduate earns about $1.4 million more over their lifetime, and for the median female graduate nearly $1 million. Graduates are also much less likely to be unemployed, more likely to experience better health outcomes over their life, and are more likely to be employed in meaningful and secure jobs. Low participation amongst disadvantaged students is more likely driven by sociocultural rather than financial factors. Students from disadvantaged backgrounds require no up-front money to pay their fees, yet universities will only offer places to students deemed academically prepared. In a 2009 study using longitudinal survey of Australian youth (LSAY) data, Buly Cardak and Chris Ryan found that, after controlling for a student’s university entrance scores, university participation rates were approximately equivalent between students from different socioeconomic background.

What matters for getting into university is prior learning opportunities. To support this claim, I have gathered index of community socio-educational advantage (ICSEA) scores for Victorian senior secondary schools from the My School website. ICSEA measures a school’s educational advantage based on parent’s education and occupation, geographical location, and proportion of Indigenous students. I matched this against data from the Victorian Government’s On Track survey, which tracks the 2016 activity of Year 12 completers in 2015.

Figure 2 shows the plot of university participation rates and ICSEA scores for Victorian secondary schools. There is a strong relationship between a school’s ICSEA value in 2015 and the proportion of 2015 Year 12 completers that enrolled in bachelor degree in 2016. In some of the most disadvantaged schools less than a third of the Year 12 cohort go on to university, whereas in the most advantaged schools nearly the entire cohort does.

Figure 2: Victorian schools by ICSEA scores in 2015, and the proportion of 2015 Year 12 completers enrolled in higher education in 2016
Higher Ed ICSEA Correlation
Notes: Includes 389 schools in the analysis. The proportion of students enrolled in higher education also counts those that deferred their place in 2016. Sources: My School website; On Track (2016)

Parental education and occupation is also important. According to the Australian Bureau of Statistics (ABS) 2014 General Social Survey, 57 per cent of all people aged 18 to 70 that had a male parent with a bachelor degree or above, had a bachelor degree or above themselves. In contrast, only 25 per cent of the same age-brackets, except with a male parent with no post-school qualifications, had a bachelor degree or above. As figure 2 shows, 57 percent of 20-24-year-old people with parents in managerial or professional positions either had, or were studying, a bachelor degree or higher. In contrast this was only true of 20 per cent of the sons and daughters of machinery operators, drivers, and labourers.

Figure 3: Highest education attainment or enrolment of 20-24 year old’s by parent occupation 2014

HILDA Higher Ed

Notes: Original data taken from the 2015 HILDA survey. Sources: See Table 3 in Norton and Cakitaki (2016)

Lowering the repayment threshold

A lower repayment threshold makes the HELP system more sustainable over time, but it does throw into question the underlying philosophy behind the HELP scheme. One of the ticking time bombs in the budget is the HELP program. HELP loans have two main costs to the budget: first is an implicit subsidy on the borrowing costs students face, because HELP is indexed to CPI but the Government has to borrow the money it lends out at the market rate; second is debt not expected to be repaid (DNER). It was never intended in the design of the loan scheme that everyone would repay their HELP debt in full, yet as more people enter the HELP system the potential cost of HELP to the budget becomes much higher. According to recent Australian Tax Office figures, over 2.4 million people had nearly $48 billion in HELP loans remaining outstanding, and only 22 per cent of debtors made a repayment in 2013-14. The lower threshold will bring an estimated additional 183,000 HELP debt holders into the system. The architect of HELP, Bruce Chapman, has also argued that the lower threshold improves the case for expanding the demand driven system to include sub-bachelor places, the graduates of which typically earn much less than bachelor graduates.

Yet the new proposed threshold changes the philosophy of HELP as it is conventionally understood. HELP has traditionally been seen less as a loan, and more as an extra contribution graduates make once they begin earning incomes higher than the average Australian. The new threshold of $42,000 is nearly $5,000 below median earnings, which in 2014-15 was $46,854. While this is still substantially above the minimum wage, the policy discourse has changed to one of personal responsibility. Rather than insure graduates against the event of lower than average incomes, HELP is now being reimagined as insurance against financial hardship. Now it’s more a safety net than socioeconomic mobility insurance.

1.0 cheers for Emerson 2.0

As a strategy, Emerson 2.0 is probably the best of the worst options, or as the late Neville Wran would say, ‘a shit sandwich’. The cuts were probably expected by the sector, but they will still hurt, and are likely to affect the student experience over time. The shift to more performance based funding leaves room for concern on the specific details. Increasing the student contribution was probably the least damaging cut, and a better outcome may have been to increase the contribution further instead of an efficiency dividend. The lower repayment threshold will help the budget over the long run, but it also fundamentally changes the philosophy underlying HELP. In an ideal world there were better places to find savings to fund Gonski 2.0, including winding back corporate tax cuts, and removing tax expenditures. Yet given the political constraints Simon Birmingham faces, his Emerson 2.0 strategy deserves a single cheer.