University reforms spread financial pain widely but fairly
Published by Australian Financial Review, Wednesday May 3
The Liberals are battle-scarred on higher education. A radical plan to cut government spending on universities and deregulate student fees failed in their first term. Education Minister Simon Birmingham is now trying again, with a new package he describes as “fair, measured and modest”.
Compared with Christopher Pyne’s 2014 reform proposal, the budget pain is spread across more groups. Students fee increases will be capped at a small rise on current levels, but universities will be more affected, a larger share of HELP debtors will have to repay, and most non-citizens will lose tuition subsidies.
Under Birmingham’s plan, fee increases capped at 7.5 per cent on current rates will be phased in between 2018 and 2021. The government says the total per courses will range between $2000 and $3600 for a four-year degree. In most cases the extra charges will add less than a year to student loan repayment periods. Students would rather not pay extra, but these changes do not fundamentally change the economic appeal of higher education.
Worse for universities than 2014
Universities, by contrast, have more cause for worry than in 2014. Although they faced larger absolute public funding cuts then than now, with fee deregulation they could recover their losses from students. This time, an efficiency dividend of nearly 5 per cent on the main teaching grant cannot be directly offset from other sources.
To deal with this, universities will have to drive a tough bargain in the current round of enterprise bargaining. In recent years, university salaries have increased more quickly than wages in the broader labour market. If the efficiency dividend wins Senate support, universities will no longer be able to afford such generosity.
For some universities, the efficiency dividend may not be their main problem. In addition, 7.5 per cent of the teaching grant will be paid on a performance basis. In a briefing for universities, government officials played down the financial risk this posed, suggesting that it was unlikely any university would lose the full 7.5 per cent. But significant sums will ride on indicators such as student retention rates and graduate employment levels, over which universities have, at best, partial control.
Graduates, like universities, would be more affected by 2017 than 2014 policy. Pyne proposed lowering the initial threshold for making HELP repayments by 10 per cent – a rare part of his package that was eventually legislated last year. From 2018-19, the initial threshold will be about $52,000. Birmingham wants a $42,000 threshold, with these debtors paying 1 per cent of their income. Debtors now pay at least 4 per cent of their income.
New repayment rates
There are good policy reasons for bringing the initial threshold down. A quarter of the $52 billion in outstanding HELP debt is never expected to be repaid, and without policy change will eventually be written off at great cost to taxpayers. Much of this spending is very poorly targeted. In work the Grattan Institute published last year, we found that nearly 40 per cent of HELP debtors likely to be affected by a $42,000 threshold live in households with disposable income exceeding $80,000 a year. This is because the HELP debtors typically work part-time but have partners who boost household income.
Most HELP debtors who are now repaying will, if the Birmingham package passes the Senate, do so more quickly. Typically, they will pay another 0.5 per cent of their income, but graduates earning over $120,000 a year in 2018-19 would incur HELP repayments of 10 per cent of their income, instead of the current 8 per cent. All up, more than 500,000 people could have their annual cash flow affected by HELP reform, although mostly by small amounts.
For New Zealand citizens and permanent residents, Birmingham’s package is very mixed. They would get access to HELP loans, which they mostly do not now. But with a few exceptions they would no longer be entitled to tuition subsidies. Recently announced delays in granting citizenship will increase the number of prospective students affected by this change.
The 2014 Pyne reform package failed in part because students would have made a disproportionate contribution to budget repair. The 2017 Birmingham reform package spreads the pain more widely and fairly, but in doing so gives more people a stake in the status quo. That is a political risk. But it might work, especially if the budget more broadly can fairly distribute responsibility for ending the deficit.