The surprise hidden in the higher edu discussion paper

By Mark Warburton

May 11, 2016

melbourne university

University financial planners, policy officers and the various university lobby groups will need to think about how to deal with a potential $3.75 billion funding reduction over 2.5 years beginning in 2018 as they consider their responses to the higher education discussion paper released by the government on budget night.

They have until July 25 to provide feedback on the individual elements of a new higher education reform package.

The discussion paper states that any options for changing the current policy must “meet the financial sustainability savings outlined in the budget”. You won’t find anything called the Higher Education Financial Sustainability Savings in the budget papers. What the sector is being told is that if it wants to change the current package, it cannot cost more than is in the budget.

So before anyone can respond to the consultation paper, they need to understand what is in the budget. This is not completely clear. There is no problem understanding what is meant by delaying implementation by one year. But what is meant by “removing full deregulation of fees”?

There is little doubt that the 20% cut to student subsidies under the Commonwealth Grant Scheme (CGS) remains in the budget. It is the budget assumption about the level of student fees that is not clear. Has the government completely removed all student fee increases from its estimates?  Or has it just removed the excess above what is required to compensate for the 20% CGS reduction — an amount that would be equivalent to a 30% increase in student fees?

If the budget assumes that student fees remain at their current level, universities will need to decide what they say about a proposed change which reduces their total revenues by around $1.5 billion every year from the beginning of 2018 — a revenue reduction of around $3.75 billion over the budget forward estimates.

The government should clarify what it has assumed in the budget. Does its underlying cash balance provide the funds to finance the increased loans to students that a 30% increase in fees would require? This is important for universities because of the significant impact that it will have on their future revenues. The funding for Commonwealth supported places is the largest source of university revenue.

While a lot of claims are made by politicians about large cuts to the higher education sector, those claims are often spurious. However, if the government is claiming the 20% reduction in CGS subsidies and is not increasing student fees, it is proposing a reduction in university revenues of a magnitude not previously contemplated.

Universities will be hoping that the government has budgeted for student fees to increase to compensate for the proposed CGS reduction. This would mean that their revenues are not affected by the overall change to the funding of Commonwealth supported student places, even if they are affected by other changes in the package.

This is the major issue for universities thrown up by last week’s budget and it is examined further below, but there is plenty more that the sector needs to think about. They will be well advised to re‑cap where this exercise had got to immediately before the budget and then look at what the budget papers say about where to from here.

What was the state of play before?

The original package of changes was announced in the 2014-15 budget and the required legislation was presented to the Parliament and defeated before the end of 2014. Christopher Pyne then announced two changes to the package.

The original package had included the removal of all HELP loan fees and these were to be replaced by indexing HELP debts at the bond rate.  This was to be a more equitable approach to reducing the cost of the HELP scheme. HELP loan fees currently apply only to some borrowers and the bond rate of interest was to apply to all borrowers.

But the bond rate of interest was too contentious and Pyne removed it, reinstating the CPI as the basis of HELP debt indexation. But the removal of all HELP loan fees stayed in the package, meaning that the HELP program will now cost more than it had in the past. He then added even more cost by introducing a concession removing CPI indexation for primary carers with HELP debts who are earning below the minimum HELP repayment threshold and have a child under five years old.

The budget was adjusted for these changes and new legislation to implement the revised package was introduced in December 2014.  Parliament wouldn’t support this package either and by October 2015 the government had accepted that its changes would need to be delayed by one year to the beginning of 2017. Again the budget was adjusted, but this time it revealed some startling information about what had happened to the package.

The cost of the one year delay was included in an update to the 2015-16 budget, but was a bit hard to comprehend — a saving of nearly $400 million in fiscal balance terms but a cost of nearly $400 million in underlying cash terms. That’s clear, isn’t it?

We got a better insight into what had happened when the Parliamentary Budget Office (PBO) released its Unlegislated measures carried forward in the budget estimates — February 2016 update. Most people were still assuming that the package saved money in the long term but they were wrong. It had turned into a spending package.

The PBO work showed that in 2018-19, the higher education package would save only $102 million in fiscal balance terms. More significantly, it showed that over the 10 years to 2025-26, it would cost the government more than $2 billion dollars in total. So what had happened?

When the government dropped the real interest rate on HELP loans it gave away savings of $1.2 billion a year. It was a deliberate government decision to reduce the savings from the package. Less deliberate was the multi-headed hydra of VET FEE-HELP which also took a massive chunk out of the savings.

The removal of all HELP loan fees had always been the biggest spending element in the original package. But VET FEE-HELP lending doubled in each of the next two years causing a massive increase in the cost of removing the HELP loan fees. In the current budget, the government estimated that the cost of removing loan fees in 2017 alone is around $750 million dollars. So this increased cost, combined with removal of the HELP interest rate, explains why the package had become a long term net spend.

The accounting treatment for the HELP scheme means that it is much harder to see the long term costs in the underlying cash figures.  In fiscal balance terms, the full saving from a HELP loan fee is recognised in the financial year in which a HELP loan is made. But the government does not actually get more cash from a HELP loan fee until students are working and making repayments. So the cash saving from having a loan fee does not come until many years down the track.

But if you look at the PBO’s work you can still see that over the years in underlying cash terms the package, as it stood immediately prior to the budget, slowly turned from saving money to spending it.

What happened in the budget?

The government made it clear that it “remains committed to implementing reforms, which continue to be delayed in the Senate” (Budget Paper 1, page 3-25) and it announced two new changes to the higher education package. Entitled “further consultation”, these changes produced $2 billion in savings in fiscal balance terms.

As discussed above the first change was that there would be an additional one year delay, so the package does not start until the beginning of the 2018 year. The second change was removing “full deregulation of fees”.

None of the additional proposals in the minister’s discussion paper have been included in the budget figures. They are not mentioned at all in the official budget papers. They are just options in a discussion paper. Notable among them is one that attempts the incremental introduction of fee deregulation, rather than Christopher Pyne’s big bang approach. It will be interesting to see what everyone says about it in their submissions.

What is meant by removing ‘full deregulation of fees’?

Not proceeding with fee deregulation could simply mean that there is an upper limit on student fees. It does not rule out higher fees.

While the 20% cut to CGS subsidies remains in the budget, the assumption about the level of student fees is unclear. The ambiguity is graphically illustrated in the chart below. Has the government budgeted for New package option A which removes fees in excess of what is required to compensate for the 20% CGS reduction? Or has it budgeted for New package option B which completely removes all student fee increases?

This is an important question with major budgetary implications that didn’t get picked up in last week’s Senate estimates hearings.  Student fees would need to rise by 30% to compensate for the proposed CGS reductions. Students currently contribute nearly $5 billion a year and most of that is borrowed under HELP. An increase of 30% would require the government to borrow just under $1.5 billion a year from 2018 to provide for the additional cash outlays to be made under the HELP scheme.

(click to enlarge)
(click to enlarge)

The budget papers show an $868 million save in 2019‑20 in fiscal balance terms. We know that fiscal balance figures do not include the major component of savings from reduced lending under the HELP program — the ‘debt not expected to be repaid’.  So there would seem to be a very high level of saving associated with not proceeding with fee deregulation and the delay in implementation. It is why I think the budget papers are based on new package option B. If I am right, it will have a profound impact on universities.

So what is still left in the budget?

In its introduction, the discussion paper indicates that its purpose is:

“ … finalisation of the revised higher education reforms … that support the government’s vision of a stronger, more innovative and responsive system … while meeting the financial sustainability savings outlined in the budget.”

As I indicated at the start if you want to spend more by supporting a particular option included in the discussion paper, you will need to find a commensurate reduction in spending to go with it. So it is useful to have a complete list of what remains on the table, or should I say in the budget. To the best of my knowledge, this is the list of the elements that are now in the package:

  • a 20% reduction in the CGS rates of student subsidy;
  • expansion of the demand driven system to private higher education providers and to student places in sub-bachelor courses (diplomas, advanced diplomas and associate degrees);
  • removal of FEE-HELP and VET FEE-HELP loan fees and limits;
  • tightening of HELP repayment requirements;
  • a concession removing CPI indexation for primary carers with HELP debts who are earning below the minimum HELP repayment threshold and have a child under five years old.
  • a change in the indexation of all higher education funding to CPI;
  • a reduction of the research training scheme by 10 per cent and introduction of fees for research students to compensate for these reductions;
  • the application of an efficiency dividend to the ARC; and
  • removal of all HECS-HELP benefits which provide concessional loan repayment arrangements for some professions.

And of course it needs to be clarified if student fees are to increase by around 30% to compensate for the 20% reduction in CGS subsidies.

There is one final matter that you need to decide when putting your preferred policy package together. It is whether you think your policy package has to be cost neutral in fiscal balance terms or underlying cash terms. But don’t worry, it won’t be much of a problem unless you propose a change to the HELP scheme.

Good luck with avoiding that little minefield!

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