Posts by "Beni Cakitaki"

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.

Budget 2016: A Good PaTH for Tackling Entrenched Disadvantage

A surprising thing happened in the 2016 budget. The Coalition included a youth unemployment policy that targeted the most disadvantage people and also got a tick of approval from the opposition.

There were no vestiges of the punitive policy announced in 2014 that punished young people for being unemployed. Instead, the government has come up with a policy that recognises the socioeconomic dimension to youth unemployment.

The new program is called the Youth Jobs PaTH (Prepare-Trial-Hire) and consists of the following stages:

1. Young job seekers (between the ages of 15-24) will be given training in what are called ‘employability skills’. These are the foundational skills needed to get and maintain a job, such; ability to work in a team, suitable presentation, workplace etiquette, and IT skills.

2. 120,000 internship places will be set up over four years for young job seekers after six months in the system. The job seeker will receive an additional $100 a week on top of their regular income support, and the business taking on the intern will receive an up-front payment of $1000.

3. Businesses will be incentivised to employ young job seekers through a wage subsidy between $6,500 and $10,000.

The government has also committed to greater investment in actuarial analyses that better target people at risk of long term welfare dependency.

But it did not take long before the policy was publicly derided. Unions believe it will result in job losses and young workers will be exploited. No doubt this is a possibility, and this will rest on the finer details of the policy when they are drafted into a Bill, but currently there is little evidence to suggest this outcome is inevitable.

Others, such as the journalist Tim Dunlop, believe PaTH is just another policy designed to discipline and punish young people for not finding jobs that don’t exist. Dunlop argues that technology is changing the nature of work, so that in the future there will be far less jobs for people to do. His policy to deal with this, which has now become quite trendy, is for the establishment of a guaranteed basic income.

The basic income idea has plenty of merit, yet Dunlop’s analysis misses an important aspect of the PaTH policy – this program is designed to help young people at risk of long term unemployment get jobs. It is not the same blunt instrument as ‘work for the dole’.

Disadvantaged young people are one of the groups most at risk of long-term welfare dependency. People with lower levels of education are more likely to be welfare dependent, and the longer a person is unemployed the more at risk they are of long-term unemployment. Longitudinal analysis by Francisco Azpitarte and Eve Bodsworth from the Brotherhood of St Laurence Research and Policy Centre, shows that disadvantaged groups are more likely to be unemployed for longer.

There is an alarming number of young Australians between the age of 15 and 24 that are not engaged in employment, education or training, often referred to by the acronym ‘NEET’. In 2015 over 90 thousand 15-19 year olds and 217 thousand 20-24 year olds were identified as NEET in Australian Bureau of Statistics (ABS) Education and Work survey. While this did not vary greatly by gender, when broken down into socioeconomic status (SES) deciles, the proportion of young people that are NEET is heavily skewed toward the lower SES deciles.

There are two ways to look at this.

The first, shown in Figure 1, is to look at all people identified as NEET in the each age group and then find out what the different shares are for each SES decile.

In a state of perfect equality, the proportion will be equal among SES deciles. That is, the lowest and the highest SES decile would each make up 10 per cent of people identified as NEET.

The actual shares are heavily skewed. The share of NEET people for the most disadvantaged young Australians represent more than triple that of the advantaged. The bottom three SES deciles make up over 45 per cent of all NEET 15-24 year olds.

Figure 1: People from disadvantaged backgrounds make up the largest share of NEET between the ages of 15 and 24 years old
Y-axis: SES decile share of all people aged 15-19 and 20-24 that are identified as NEETBeni_Fig1_PaTHSource: ABS (2015) Education and Work, 2015

Second, we can look at what proportion of each SES decile is identified as NEET, as has been done in Figure 2. A high proportion of the most disadvantaged 15 to 19 year olds are identified as NEET, but what is really striking is the 20-24 age bracket. Almost a third of the most disadvantaged 20-24 year olds, 40 thousand young people, are identified as NEET. More than a fifth of 20-24 year olds in the three lowest SES deciles are identified as NEET – more than 100 thousand young people.

This large jump occurs after the common school leaving age, suggesting that a substantial group of young people finish school ill equipped to take the next step into work or study.

Figure 2: People from disadvantaged backgrounds are much more likely to be NEET after school leaving age
Y-axis: Proportion of SES decile identified as NEETBeni_Fig_2Source: ABS (2015) Education and Work, 2015

By focussing on young people unemployed for more than 6 months, PaTH targets the most disadvantaged young people. The strength of the program is that it provides these young people with work experience, and makes it less risky for businesses to give them a chance.

Job training has been available for a long time now, but employability and targeted work experience programs are rare. For some young people from areas of entrenched disadvantage, this policy will give them chances they otherwise would not have. There are likely important debates to be had around the detail of the policy, but it cannot be said to be punitive, and it is certainly not punishing.

Wild geese, black swans, and the goose that lays golden eggs.

In our economic exploits, we often get confused and chase wild geese rather than those that lay golden eggs. Engaging in this frivolous endeavour distracts from the black swans that lurk in the distant fog.

That is the story of the Federal Government’s budget over the last few decades.

Wild Geese

A blatantly unfair budget was handed down last May in the name of chasing a budget surplus. This wild goose chase for fiscal surplus has been unproductive, and has had a high opportunity cost.

A budget surplus in effect actually takes money away from citizens who spend and invest, in favour of some abstract notion of a ‘balanced budget’. This logic treats the theory of government finance as analogous to that of household finance. But a State is more than the sum of its households. Delaying urgent investments in infrastructure and human capabilities due to the notion of thrift, is lived sub optimality for present and future citizens. The idea that the Commonwealth needs to stockpile money before it can spend it is quite misguided. When the government is the issuer of currency, the axiom of balanced budgets breaks down.

Conventional wisdom demands that the government balances budgets over the business cycle to avoid excessive public debt. What is the reasoning behind this?

First, budget deficits ‘crowd out’ the financing of private investment. It is believed that public investment is less productive than private, and so when governments move into financial markets they push up interest rates and crowd out private entrepreneurs.

Second, persistent deficits are seen to be unfair. A build-up of debt puts higher costs on future generations.

Third, counter cyclical fiscal policy has been challenged by the idea of ‘Ricardian equivalence’. This trick, theorized by Robert Barro, postulates that households have perfect intergenerational altruism. There is no difference between using taxes or debt to finance government spending, because households compensate for the debt burden on future generations by saving proportionately. According to this reasoning there is no multiplier effect from government spending because citizens have the prescience to save for higher taxes in the future.

Fourth, recently the controversial claim has been made that too high a debt to GDP ratio lowers economic growth. The results of the study by Carmen Reinhart and Kenneth Rogoff show that after public debt to GDP levels reach 90 per cent, there is a fall in the GDP growth rate of roughly 50 per cent.

But the conventional wisdom is not as ironclad as its adherents would presume.

In the first instance, the empirical evidence shows that government incursions into financial markets have not driven up interest rates. In fact most advanced economies are characterised by historically high public debt and low interest rates. A more likely explanation is that the private sector has slipped into economic inertia, and rather than taking advantage of cheap debt by investing, is instead deleveraging and saving. This is secular stagnation, where there is too much saving in the economy and not enough investment.

The next point follows nicely from the first. Current generations should incur more debt to fund projects that increase the capabilities and potential of generations to come. Public investment can both stimulate economic activity throughout the economy and provide assets that yield benefits for future generations as well.

Ricardian equivalence does not factor this in. Even granting that people act as rationally as Barro would presume, the theory neglects to take into account the possibility that well invested public debt can amplify future income, and thus the debt bill as a proportion of income is less for future generations. Much ink has been spilled on even more arcane criticisms. But snapping back to reality, Barro assumes a Spockian level of rationality. People have bounded rationality at best, and cannot perform the mental contortions necessary for a Ricardian world to prevail.

Last, the Reinhart and Rogoff results are a classic case of the dictum: ‘correlation does not imply causation’. Despite the fact that their spreadsheets were found to have faults, all they have shown is a correlation between high levels of debt and low growth. But the causation can run the other way. Low growth, especially during recessions, often necessitates higher levels of public debt through stimulus spending, but also through the automatic stabilisers of lower tax revenue and higher welfare payments.

A better foundation for fiscal policy is to assess the function a given public financing position serves. In a ‘functional finance’ paradigm, deficits are irrelevant if the broader goals of a society’s public policy are met. Using deficits to finance projects and services that improve the welfare of society are necessary for a perpetual entity like a State.

Black Swans

To balance present and future needs of society, fiscal policy needs to be made with ‘black swans’ in mind. The black swan concept relates to the classic problem of induction: if I see 99 white swans does that then necessitate that the hundredth swan I see will also be white? Or to put it in another way, does not having seen a black swan negate its existence? Black swans do exist, but we can’t know they do until we see them. Public policy can reduce exposure to black swan events.

According to economist Bruce Chapman, governments should manage risk for its citizens. Life is risky; the future is uncertain and black swans lurk in the distant fog. At the micro and macro level, uncertainty needs to be coped with– by diffusing risks, the risk of adverse events in the future are minimised.

One way this can be done is by coordinating and mobilising unused resources in the economy. When the private sector is risk averse and lacks the animal spirits to invest, the State can play an entrepreneurial role in the economy.

Australia currently has plenty of unrealised capacity in the economy. The labour market underutilization rate is the amount of people unemployed, as well as people wanting more work. As figure 1 shows the youth underutilization rate is at its highest point on record. The general underutilization rate is also moving upwards at an alarming rate. It is also more difficult for recent university graduates to get a job than it was during the recession of the early nineties.

Figure 1: Labour market underutilization rate for 15-24 year olds and all age groups


Figure 1

Source: ABS 2015, selected labour force statistics


Conventional wisdom maintains that unemployment is stable in the long run. Even after a shock that causes sudden unemployment, over time unemployment will recover to its long run equilibrium position. But, to paraphrase the Polish economist Michal Kalecki: what happens in the short run changes real economic conditions in the future. An example is the phenomenon of hysteresis, where those out of work in economics downturns are less likely to find work when the economy recovers.

Since the late seventies, after the black swan of ‘stagflation’ – low growth accompanied by high inflation – macroeconomic policy has shifted from ensuring full employment, to targeting inflation. This is the result of an uncritical acceptance of the non-accelerating inflation rate of unemployment (NAIRU). Macroeconomic policy makers should set its sights on full employment and worry less about containing inflation. If extra money put into the economy is well targeted, than a monetary expansion can boost employment without being inflationary.

The goose that lays the golden eggs

Our future prosperity will come from long term investments in human potential.

In the short run, policies that focus on full employment are necessary. The NAIRU needs to be thrown out, and better measurements of ‘slack’ in the economy need to be used to guide a full employment macroeconomic objective.

Implicit in this is a radically different paradigm for monetary policy. Government, as the issuer of currency, can spend an unlimited amount of money to fund public works; the only real constraint is the amount of real capacity in the economy. Bill Mitchell, director of the Centre of Full Employment and Equity, has suggested that a bottom of the market, publicly provided job be made available for those that find themselves unemployed.

In the long run, investments need to be made in the Australian people.

Public investments in high quality childcare would yield high long term benefits and can serve two purposes.

First, it would remove some of the constraints on mothers wanting to return to work. High marginal tax rates and expensive childcare can be a potent deterrent. A 2012 report by the Grattan Institute found that furthering female workforce participation could add $25 billion to GDP. It is true, as estimated in a 1997 study by the ABS, that predominantly female, unpaid domestic labour is worth about a quarter of GDP. But the value added by higher female workforce participation is likely to cancel out this loss. Furthermore, financial independence is important for strengthening the bargaining position of women in households.

Second, high quality childcare provision can improve mobility and inequality if there is adequate access for people from disadvantaged backgrounds. The economist James Heckman has shown this to be one of the public investments that yield the highest payoffs for society.

More investment in education over all year levels is also needed; the Gonski reforms needs to be funded into the future, and stricter selection for teachers is necessary. Research and development also needs to be well funded by the public purse.

Better public transport infrastructure is essential with growing populations. Along the same lines, a shortage of housing supply near the CBD is causing problems of speculation, and making housing unaffordable. But the real and social costs of sprawling cities have become a problem due to inadequate transport and restrictive planning regulations that limit supply near to the CBD.

These geese will lay golden eggs for future generations. An enlightened Government should abandon the wild goose chase and invest in the human capabilities of the citizens it represents. It is only fair.

Higher education policy: The struggle for fairness with an unwieldy beast

Australian higher education policy is a difficult beast to tame. Economic theories toss and tangle with principles of fairness and ideas of justice. Universities, employee groups, student groups, mild mannered economists, think-tanks, politicians, Vice-Chancellors, and Greg Craven, are hurled into the ruckus. But wrestle they must. The beast does not yield easily.

The last few weeks Education Minister Christopher Pyne has been rushing around Canberra trying to sell the new idea from higher education expert, Bruce Chapman. The Minister is in a fight for his political skin and the Chapman proposal does allow him to save face. Universities will still be able to set fees but deductions will be taken from the main teaching grant should a university increase fees over a set threshold.

But the idea has holes. The Chapman policy is designed to put a wet blanket on fee increases. Yet overall students are still the losers. It will restrain fee increases, but universities with significant market power won’t be deterred. When universities raise their fees above the ‘tax-free threshold’, students will pay more and the Commonwealth will penalise students by removing a portion of the subsidy. A university that wants to maximize university income bears none of the burden of their fee setting decisions.

This highlights another problem. Higher education subsidies have become relics of history rather than based on consistent policy principles and comprehensive costs and benefits. Current subsidies are for the most part a result of a study undertaken in 1990 that looked at operating costs between institutions and disciplines and assigned funding rates accordingly. There were further changes in 1996 that differentiated student contributions based on the long term earning prospects of graduates in some disciplines. Since then costs have changed, as well as graduate benefits and projections of the long term sustainability of the system. Trade-offs need to be made.

Generally a subsidy should be used to induce people to do something for the social good that they otherwise wouldn’t because of the low private gain. But the evidence from applications data suggests that for a given change in the fees there is no notable response in applications. The largest subsidy goes towards Medicine. In 2012 when the ‘demand driven’ system was introduced, Medicine places remained capped. The effect is many students vie for a small number of places, so there is much unmet demand for Medicine. As figure 1 shows, Medicine graduates earn substantially more over their lifetimes on average than other disciplines. Yet a Medicine student only pay about a third of their total tuition. Many of these disciplines could afford to pay more toward the cost of their degree without it having great effect on the superior benefit they receive.


Figure 1: Median graduate earnings premium compared to Year 12 by discipline, 2011


Figure 1: Median graduate earnings premium compared to Year 12 by discipline, 2011

Notes: Earnings for medicine, and for male graduates in dentistry, law, engineering and management and commerce are all under-stated due to the top census income category of $2,000 a week or more. Male bachelor graduate have a higher Year 12 comparison point than women. Grattan calculations based on ABS Census.

Sources: Andrew Norton (2013) Mapping Australian higher education, 2013 version, Grattan Institute.

Deregulating fees and reducing subsidies causes angst and dread amongst current students. For reasons of altruism rather than dogged self-interest – I hope. Intuitively, when things become more costly someone near the bottom of the social ladder often ends up missing out. But this is a red herring. With a HECS-HELP loan students are not charged anything upfront and only have to repay if they earn an annual income above a threshold of $53,345. The cost of lower subsidies is only incurred if the student benefits financially from their education.

It is either ignorant, or intellectually dishonest, to presume that there will be a drop in participation from disadvantaged students should fees rise. The evidence just doesn’t stack up. A 2006 longitudinal study found that for a given university entrance score, the proportion of low, medium, and high socioeconomic status (SES) students attending university were approximately the same. Previous classroom achievement determined movement into higher education, but low SES students were less likely to achieve. Rising low SES enrolments after fees rose in Australia and England, show that the sensitivity of these students to higher fees is low. Living costs are important. The costs of moving, rent, food, textbooks and all other expenses associated with university attendance are likely to deter those that fall through the cracks of mean tested support payments. Yet when it comes to the price of tuition, hope for the future trumps the law of demand.

Improving the participation of low SES students is more complex than determining the ‘right price’ of a university degree. Disadvantaged people are culturally dislocated from the culture of higher education. Despite ourselves, from the moment we are born, our class inflicts its indelible mark. Parents pass their habits, knowledge and cognitive traits down to their children. Children from professional families develop vocabulary earlier, are better practiced at interacting with adults, and also are put through ‘concerted cultivation’ of music lessons, sport, and other activities designed to impart important skills for life. This tutelage is strengthened in the selective public and private school education received predominantly by the middle and upper classes. The important cultural traits learned in these earlier years are virtues in the capitalist labour market. Later in life the least virtuous suffer unemployment for their sins. The policy with most promise for expanding higher education participation is to channel more investment into early childhood education.

The Pyne reforms don’t overtly threaten the hopes of university attainment for disadvantaged people (putting aside the rest of the budget). The real problems of fee deregulation are left unattended when this confusion is granted reign.

In the modern economy a higher education qualification is now a necessary condition for getting a job. Students either pay the asking price for a degree, or risk higher lifetime unemployment and lower earnings. Fairness for its own sake is the first casualty. If HELP allows universities to make offers that students cannot refuse then there is a dilemma of justice. Should students pay for university activity that has nothing to do with teaching and learning? No. It is manifestly unfair if students are charged higher fees when they are divorced from the cost to teach.

Part of the reason a student fee was reintroduced in 1989 was an ethical imperative. Students, typically middle or upper class, were undertaking degrees that were paid for by people, typically ‘working class’, that had not gone to university. Cooks and cleaners helped pay for the degrees of lawyers and bankers. Public benefits flowed upward from the blue-collared to the French-cuffed. This was regressive. In principle students should pay for the degrees that would earn them superior incomes and higher social standing.

Fee deregulation leads to contradictions of this principle. Higher fees in some universities will subsidise research for society, and prestige seeking for universities. It is widely acknowledged in the economic literature that the public should fund breakthrough basic research. This is because basic research yields inherently uncertain benefits that are difficult to commercialise, and also have a higher social payoff if the research is made publicly available. Thus for a socially desirable amount of basic research to be undertaken, public funding must step up and fund it. As figure 2 shows, in the international student market where universities are allowed to charge fees that have no bearing on teaching costs, they tend to spend this extra cash on research and other prestige bolstering projects. To maintain fairness in the system the public should pay for research, and students should pay for their tuition.

Figure 2: Average tuition fee levels and research output by university grouping 2009


Figure 2: Average tuition fee levels and research output by university grouping

Notes: Average fees are weighted international and domestic tuition fees. Publications are weighted by the DEEWR.

Sources: Michael Beaton-Wells & Ernie Thompson 2011, Economic analysis of the role of international student fees in Australian universities, University of Melbourne.

Sustainability is also threatened if universities can charge what they like. There exists in higher education what economists call a ‘moral hazard’ – when a person can behave badly because the consequences of their actions are worn by others. This is especially acute as information is so poor. Students must use a range of proxies for quality in deciding between universities. Prestige signals fill the void. Higher prices are perceived to be reflective of value, and this leads to all universities raising their fees to signal quality. Global rankings also act as a prestige marker, and most rate most highly research metrics. Information problems mean higher fees will be spent by universities on more research, and other activities to further prestige. Students will continue to undertake degrees regardless of the price. Taxpayers will cover the cost of loans that aren’t repaid. Universities get a free lunch.

What to do? Other ideas that have been floated are to maintain the status quo, or to go back to capped places. These ideas don’t address the elephant in the room. For too long teaching has played second fiddle to research. Student benefits need to be at the heart of any reform. Fee deregulation would allow departures from teaching mediocrity, yet not on its own. In a recent submission to the Senate committee inquiry into the Pyne Bill the PPE Society outlined some ideas on how to achieve fair fee deregulation. These are:

  1. Remove the legislative requirements for a university to engage in research in three disciplines. This would remove the legal barriers to allow universities to specialise in teaching and learning programs.
  2. Introduce a ‘doubtful debt’ tax on universities. This would be a tax set at a flat rate on the fees of students that had made zero repayments after a set period of time. Restructured subsidies would be used to address public goods problems. A system of scholarships could be targeted to ‘at risk’ groups. Universities would also have skin in the game. This would ensure students were taught well and given the upmost support, and would mean teaching specialist academics were more valued in academia. It would also make sure that universities made all their decisions to the long term benefits of their students. Universities would have an incentive to refer academically at risk students to enabling courses. Moral hazard problems would be smoothed over as universities internalise some risk, and the burden of doubtful debt on the taxpayer would be lessened.
  3. Create a statutory undergraduate fee regulating body. This body would set the ‘doubtful debt’ tax rates, and also adjust them for various macroeconomic fluctuations. They would also monitor fees across the sector as a second layer of protection.

Fairness needs to remain the principle objective of our higher education policy. This is an inherently political question, and that is why the beast will never be truly subdued. Yet it seems that HELP creates the foundation of a fair system, we just need to make sure that it is able to continue for as long as Australia is a nation, and that the subsidies that are currently in place are put to their best use. We can have fee deregulation, and it is desirable for the most part, but it needs to be moderated so that students benefit. For this to happen universities need to take responsibility for the quality of their spending and the quality of their teaching. The struggle continues.