Australian teaching funding freeze ‘will cost more than it saves’

Reduction in graduate numbers to hit economic growth and tax revenues, says pre-budget modelling

May 6, 2018
Shoot in foot

Australia’s government will lose more than it gains from its freeze of higher education teaching grants, an analysis commissioned by the country’s universities has concluded.

The study, by Cadence Economics, modelled the implications of a reduction in graduate numbers, a predicted result of the freeze. It found that the move, which will save the government some A$2.1 billion (£1.2 billion), will cost it between A$2.2 billion and A$3.9 billion in tax receipts over the next two decades.

It will also reduce Australia’s gross domestic product by between A$6.9 billion and A$12.3 billion, because a labour force denied thousands of degree-qualified workers will be less productive.

The report says that tens of thousands of people will miss out on the salary “premium” generated by university credentials, and will pay less tax as a result. And there will be fewer degrees to boost economic activity, earnings and taxation across the board.

Combined, these two effects will reduce the tax paid by every individual who misses out on a university place by A$13,800 – more than the A$11,780 that the government would have paid to subsidise each place.

“These findings demonstrate that the short-term fiscal savings to government are offset by the long-run cost of reduced tax receipts, and are substantially less than the long-run cost to the economy,” the report says.

The modelling, commissioned by representative body Universities Australia, has been unveiled on the eve of the federal budget, set to be announced on 8 March. UA asked the government to reverse the freeze during its February conference in Canberra – a request that was swiftly rejected by education minister Simon Birmingham.

But UA said that recent claims that the government’s coffers had increased by more than A$7 billion since December, when the freeze was imposed, suggested that it was time for a rethink.

“There is no justification for persisting with this economy-curbing freeze,” said outgoing chief executive Belinda Robinson. “It’s a simple equation – less university funding means fewer skilled graduates, a hit to labour market productivity and less tax revenue for government. By reversing the university funding freeze, an economic own goal would be avoided.”

While the modelling has been released far too late to influence the budget, UA maintains that the freeze can be lifted at any time because such a move would not require parliamentary approval.

The modellers say that their forecasts are inherently conservative because they allow for inflation and overlook the improved labour force participation rates that flow from higher education. They also ignore social spin-offs such as graduates’ improved health and welfare.

However, the modelling assumes that degree-holders earn 31 per cent more, on average, than people with upper-level vocational certificates. Many estimates suggest that the wage “premium” of university study is far lower.

Cadence Economics said that its estimate was based on data from Australia’s 2016 census. It also said that this year’s estimate of the reduction in enrolments as a result of the freeze – between 2,000 and 5,000 – was “pretty conservative”.

The freeze was announced well after universities had begun signing up students this year, and only the Australian Catholic University reduced offers as a result. However, the freeze could affect mid-year admissions.

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