All is not as it seems with the Turnbull government’s proposed changes to higher education funding.
Federal Education Minister Simon Birmingham has argued that higher tuition fees, lower direct grants to universities and a reduced HECS repayment threshold for graduates will deliver a “fairer deal for taxpayers”.
But unusual budget accounting rules mean the promised positive impact of these changes on the federal budget’s bottom line is far from clear.
Accounting techniques used during budgets
Over recent decades, governments around the world, including in Australia, have increasingly adopted private sector accounting techniques in their budget processes.
This change helps explain the impulse behind the government’s plans to increase tuition fees by 7.5% and reduce direct grants by introducing a new efficiency dividend.
If the decrease in grants is matched by the increase in fees, universities will see little change in their funding relationship with the government.
Because the costs of tuition fees are deferred through the HECS system, governments will continue to transfer money upfront from Treasury coffers to university bank balances.
The key difference lies in how this funding relationship is accounted for.
Under private sector accounting rules, the portion of money still transferred from governments to universities, but which becomes student debt, is no longer counted as spending.
HECS debt is instead accounted for as a financial asset held by the government and therefore removed from key budget balances announced on budget night.
While the cost of creating new HECS debt is moved off the books, private sector accounting sees traditional grant-based funding as real budget cost and therefore a prime target for savings.
Over time, the effect of moving from grant to debt-based funding is to shift the cost of university funding from all taxpayers to a more narrow group of current and future students, who make income-contingent repayments.
Past changes to HECS
We have been researching how changes in accounting methods have reshaped the politics of HECS since it was introduced in 1989.
At one level, the Turnbull government is following the example set by the Howard government, which also increased fees and reduced grants in 1996 and 2005. But it is also departing from the Howard government in the other major component of its higher education package: reducing the HECS income repayment threshold.
The last non-indexation change to the HECS repayment threshold was implemented in 2005 by the Howard government. The change went in the opposite direction to the current proposal, increasing the income level at which HECS repayments kick in from about $25,000 to about $35,000.
Strange as it may sound, this move had no negative budgetary effect, despite reducing HECS repayment receipts.
Just as government spending isn’t necessarily accounted for as spending, government income isn’t necessarily accounted for as income.
Under the same private sector accounting rules, repayments by students of HECS debt do not count as revenue. Like the issuance of debt, repayments of principal are removed from the main budget balances because it results in an equivalent reduction in the value of the government’s financial asset
Why lower the repayment threshold then?
Why then is the government proposing to reduce the repayment threshold from $54,000 to $42,000 if it will have no direct positive impact on the budget deficit?
Part of the answer to this question lies in lesser known part of the federal budget that was introduced with the adoption of private sector accounting rules.
As with corporations, the federal government now accounts for the “fair value” of the financial assets on its balance sheet. Fair value is basically an estimate of the price an asset could be sold for to investors in the market.
A number of bodies have been raising alarm bells about the fair value of the government’s HECS portfolio in recent times.
Bodies such as the Parliamentary Budget Office have noted that the fair value of outstanding HECS debt is well below the balance sheet value of around $52 billion.
This is because HECS is a concessional loan, with more generous conditions than a normal bank loan.
These concerns are a little misleading. Governments are not corporations and HECS was never designed to be a tradeable financial asset.
This much was acknowledged by the Abbott government’s Commission of Audit, which decided not to recommend privatisation of HECS debt precisely because it would be such a poor investment for the private sector. So fair value rules can’t really apply.
Nonetheless, this unusual accounting sits behind Birmingham’s claim that the level of accumulated HECS debt is “unsustainable” and needs to be repaid at a faster rate.
There is much to be concerned about with the federal government’s proposed higher education reforms, including negative effects on teaching, research and learning conditions, and financial burdens for current and future workers paying off their debts.
As the debate proceeds, it is also important to keep in mind that the government’s own budgetary savings rationale can’t be taken at face value.