Confusing figures on cost of universal allowances

July 18th, 2008 at 7:58 am by David Farrar

reports on the costs of universal are somewhat confused. The initial story in stated:

The paper shows that removing income tests on the allowance and providing it to all fulltime students would cost a total of $2.09 billion over four years.

The net extra cost of such a plan is $728 million after the existing costs of the scheme are removed, along with a forecast plunge in borrowing under the student loans scheme that might accompany such a plan.

Now this story is largely correct, but the confusion starts here because of two things. Firstly it wasn’t made clear the $728 net cost was over four years also, and the reduction in cost from $2.09 to $0.73 billion is attributed to both the existing costs of “the scheme” and a forecast plunge in borrowing.

I’ve obtained a copy of the Ministry paper, and the $2.09 billion “total net cost” actually already includes any savings from reduced student loans. The difference between the $728 million and the $2,094 million is merely the difference between the status quo and the “total net cost” of universal allowances. In 2011/12 it would be an extra $226 million of annual expenditure.

So what impact would universal allowances have on the student loans scheme? In fact fairly modest. Over four years there would be a reduction in operating expenditure of $107 million and a reduction in capital expenditure of $260 million. In 2012/12 the student loans scheme would cost the taxpayer $33 million less than if one had universal allowances.

So the original story while largely correct, was imprecise and had one aspect wrong. And then see how the story changed;

picked up the story, and as reported in the Herald says:

The Press said the $728m net extra cost of such a plan was based on removing existing costs of the scheme and factoring in an expected reduction in student loans.

NZPA have left off the all important fact that this is a cost over four years.

Then we turn to today’s Press editorial:

Figures from the ministry suggest that the total cost would be $2.09 billion over four years, although that could go down to a net cost of $728 million if student borrowing fell, as the ministry expects it might.

No no no. The $2.09 billion already takes into account a decline in student borrowing. The fall to $728 million is merely deducting the cost of current student allowances.

The Press are correct with their warning:

Voters will recall the Government’s assurance that interest-free loans would not greatly increase student borrowing. A survey of student borrowing shows, however, that since 2004 the average debt has risen 54% to $28,838. While not all of that is attributable to the interest-free nature of the loans, it does suggest that a considerable number of students (or their parents) are doing exactly what was predicted leaving their own money in the bank to earn interest and taking out a loan interest-free, at the taxpayers’ expense, to meet their educational costs.

And something the Ministry paper does not do is project any increase in student numbers, if allowances became universal. I suspect there would be an increase in numbers studying if this did happen.

Anyway back to what are the actual costs of universal allowances. As far as I can tell from the Ministry paper, the costs are:

  1. Gross costs of universal student allowances: $2,221 million/4 years or $657 million in 2011/12
  2. Reduction in operating cost of student loan scheme: $107 million/4 years or $33 million in 2011/12
  3. Net cost of universal student allowances: $2,094 million/4 years or $624 million in 2011/12
  4. Current cost of student allowances: $1,366 million/4 years or $399 million in 2011/12
  5. Net additional cost of policy: $728 million/4 years or $226 million in 2011/12

Note I don’t guarantee these 100% as the Ministry paper itself is not totally explicit with its calculations. But hopefully this gives a far better idea of the costs than the various media reports.

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28 Responses to “Confusing figures on cost of universal allowances”

  1. dave strings (608 comments) says:

    I have to admit to an unusual amount of confusion. Not with your figures David, but with those of the Ministry.

    What it seems to be suggesting is that there only one third of current tertiary students do not receive the allowance (728/2094). This seems an exceptionally low number to me.

    ON a separate point, why would I, as a parent, not encourage my children to take the interest free loan available for living costs and ‘buy’ a photocopy of their qualification from them at the end of the course for the amount of loan outstanding? In fact I did exactly that, although i had one small caveat, which was I agreed to buy it for the proportion relevent to the qualification (in other words, whjen one of mine took four years to do a three year degree – mainly because the social scene was so appealing – I paid three quarters of the loan). This approach to funding makes perfect sense, economically and socially, in my view.

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  2. pushmepullu (686 comments) says:

    ON a separate point, why would I, as a parent, not encourage my children to take the interest free loan available for living costs and ‘buy’ a photocopy of their qualification from them at the end of the course for the amount of loan outstanding

    Perhaps because you can’t afford to?

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  3. homepaddock (408 comments) says:

    “And something the Ministry paper does not do is project any increase in student numbers, if allowances became universal. I suspect there would be an increase in numbers studying if this did happen.”

    There would almost certainly be an increase in student numbers – but not necessarily in the disciplines which NZ needs.

    It would be better to reward effort and/or help people working in occupations/areas where we need them once they graduate as National is proposing to do by proposing to write off loans for medical graduates who become rural GPs.

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  4. GPT1 (2,118 comments) says:

    Either way, having a large student loan after my “investment” in education it will be a true delight to use my tax dollars to fund the next generations of students.

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  5. bobux (349 comments) says:

    Thanks DPF.

    This sort of post is one of the underrated aspects of the blogosphere. People with the time and interest to get behind headline figures can demonstrate the detail (or lack thereof), and make their views widely known. Those who dispute their conclusions can do so in public. Who knows, better-informed public debate might even improve the quality of decision-making.

    (Takes off rose-tinted glasses and goes to work).

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  6. Gooner (995 comments) says:

    How many hip operations will be cancelled to pay for this, how many beneficiaries will go without, how many children will go without food to pay for this?

    What public services are Labour going to slash to pay for this?

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  7. Rogz (12 comments) says:

    I don’t think there’s any strong argument againt the whole student loan/allowance scheme needing a real shake up, but this doesn’t sound like the one it needs.

    The problem is with Parental Income Means testing…I received no parental support after I left high school, but was unable to get an allowance because my (seperated) parents earned too much…even having worked 2 part time jobs all the way through, I still needed that ‘top up’ to get by…and as such, now have a nice big loan that gets the minimal repayment each month.

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  8. expat (4,050 comments) says:

    universal allowances encourages lefties to study 20th century film and political science while sucking my tax.

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  9. big bruv (13,727 comments) says:

    Very good point Gooner

    Labour will be slashing the pension to pay for this, they will also be forced to cut back on health, education and policing.

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  10. PhilBest (5,121 comments) says:

    # Gooner (231) Add karma Subtract karma +2 Says:
    July 18th, 2008 at 8:39 am

    “How many hip operations will be cancelled to pay for this, how many beneficiaries will go without, how many children will go without food to pay for this?

    What public services are Labour going to slash to pay for this?”

    Another relevant point, Gooner, is, how much longer are Kiwi LOW INCOME EARNERS going to keep paying the highest taxes paid by low income earners anywhere in the world, to pay for these boondoggles?

    # expat (560) Add karma Subtract karma +3 Says:
    July 18th, 2008 at 8:54 am

    “Universal allowances encourages lefties to study 20th century film and political science while sucking my tax.”

    HEAR, HEAR.

    I WISH someone with the time and resources would publish a LIST of all the trendy lefty warm-fuzzy useless qualifications being studied at the expense of all taxpayers from the bottom earners up………..

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  11. Ryan Sproull (7,101 comments) says:

    You guys really seem to look down on higher learning.

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  12. dave strings (608 comments) says:

    Pushmepullyou

    So why should I pay for their education?

    Comment from a MinEdu researcher to me a couple of years ago:

    If a child finishes year 12 (6th form) they will, on average, earn $5,000 per year more than if they leave after year 11, that increases to $10,000 if they finish year 13 and $20,000 if they earn a numerate or professional (engineering, architecture, etc.,)degree; if the complete poost graduate qualification, (e.g. law, medicine, accounting, etc., ) that increses to $40,000.

    Given that the average post graduate working life is planned at 44 years, and working in constant dollars, that suggests that a basic numerate or professional graduate will earn some $880,000 more than a non-graduate seventh form leaver. For this ability, they are asked to repay an average of $26,000 in student loans. Not a bad investment : return ratio in my perspective.

    The fact that I decide to give my kids money when they graduate, rather when I die, is surely a matter of choice for me, and I did make them earn it!

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  13. dave strings (608 comments) says:

    Ryan

    excellent!

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  14. Ryan Sproull (7,101 comments) says:

    PaulL,

    Guaranteed minimum income seems sensible enough. What are the arguments against it?

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  15. Rogz (12 comments) says:

    What amuses me the most, is that I have a sneaking suspicion that a lot of people who rail against subsidising/contributing towards Tertiary education (probably) attended University in the days when not only was it free, but they got paid to do certain degrees!

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  16. PaulL (5,971 comments) says:

    Ryan, the only one I can find is ‘that would be a lot of change, nobody would ever vote for it.’ I’m sure there are others, but like you, it only seems logical to me. It seems to me to be a policy that should find favour right across the political spectrum – reducing marginal rates for those in the transition from welfare to work is a no brainer.

    I presume there might be some argument that it results in lower taxes for the very very wealthy – if you drew a graph of effective tax rate v’s income you’d probably find that tax is lower (in fact, negative) at the low end, through the middle class perhaps a little higher, and towards the top end it would theoretically drop. Of course, those at the top end (I’m talking 250K plus here) probably pay very little tax anyway, so it is very theoretical. I suspect it would drag some of those folks back into the tax system – it would be less worth their while to try to hide.

    Also, I would feel that if you made a change like this you would also have to review all the other bits of the combined tax and welfare system. Depending on how exactly that shook out, I’m sure there would be some people disadvantaged somewhere. And depending on which party introduced it, you might find that the minimum income was set at a different point, which would change obviously who was impacted. I would also have a fair go at closing some of our loopholes – I’d introduce a capital gains tax whilst I were at it. That would be deeply unpopular, but hey, if you’re going to fix the tax system….

    I would argue that if someone calculated this such that the minimum income was close to the current benefit rate (perhaps a tiny bit higher just to make everyone happy), and we inflation indexed it or some such, then it would decrease the ability of government to fiddle with particular interest groups. Really the only levers left would be to tweak the tax rate, and to tweak the minimum income rate. Nice clear policy promises I would suggest.

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  17. PaulL (5,971 comments) says:

    Rogz, I rail against over subsidising education. I have no problem with some subsidy, but I’m not sure we need more subsidy than we need today. And I paid for my education – by working a part time job, not with a loan (to be fair, my parents let me live at home, so that counts as a subsidy, but I got no allowances due to their income).

    If I were to spend more on education I wouldn’t spend it on tertiary. If I were going to spend on tertiary, I would have a fair go at working out what areas we as a country are short in, and subsidise those courses more. Australia did just that recently – halved the HECS rate for those studying science and maths (and teaching too I think, or something obscure like that), and also matched your loan repayments if you were working in science or maths in Australia in the year you repaid. Now that would be something I could support – it does contribute to productivity.

    (Cue lots of liberal arts and pol sci grads whinging about how Bob Jones once said he’d never employ a business studies graduate, or some such quote)

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  18. Ryan Sproull (7,101 comments) says:

    PaulL,

    Yeah, our system is inherently conservative in the sense that it only really makes possible very small tweaky sort of changes.

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  19. Gooner (995 comments) says:

    Of course the Guaranteed Minimum Income is the policy prescription a certain Sir Roger Douglas advocated about 20 yrs ago. Meanwhile, the baby sleeps.

    Isn’t hindsight a wonderful thing!

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  20. artemisia (235 comments) says:

    Ryan Sproull – Guaranteed minimum income seems sensible enough. What are the arguments against it?

    One argument is the level of under the table work that goes on, including dealing in illegal substances. Lord knows what the quantum would be, but it must be in the billions each year once one takes into account all the cashies, the shopkeepers who pay themselves out of the till, the dealers, the small time property and vehicle traders, the DPB recipients with a live in partner … So not only do these folk deprive the IRD we want to give them still more money?

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  21. gd (2,286 comments) says:

    the questions I want answers to and havent been able to get are

    1. the total amount outstanding now. Future projections

    2. The average median highest loan amounts.Future projections

    3. the average median longest and shortest periods of full re payment. Future projections

    4. The annual cost to the taxpayer in interest foregone and the administration costs. Future projections.

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  22. PaulL (5,971 comments) says:

    Artemesia: Actually, the guaranteed minimum income fixes that. Everyone gets it, even if they have a job, even if they earn a fortune. And then, for every dollar you earn, you pay 20% tax (or whatever we agree the tax rate is) with no tax free threshold. You need to earn $30K or so before you end up paying the government more than they gave you as guaranteed minimum income.

    Sure, you could still do under the table work. But it now only saves you 20% – there are no abatement rates or other things to worry about. For the risk associated with getting caught, it probably is a lot less worth it at 20%. Whereas today, for someone coming off the dole (once you factor in the various supplements) the effective marginal tax rate can be 70% or more. Same for someone on WFF. This is the problem with tightly targeted benefits – the disincentives they create to try to better yourself.

    In short, I don’t think that objection is a valid one.

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  23. artemisia (235 comments) says:

    Maybe you are right PaulL, but the under-the-table mentality is very deeply entrenched here, and is not necessarily based in logic or even reality. It would take years to turn that mentality around.

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  24. PaulL (5,971 comments) says:

    Perhaps artemisia. But this proposed system would be no more susceptible to under-the-table antics than the existing one, and arguably would be less so. It would be an improvement.

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  25. gd (2,286 comments) says:

    the other big question I have asked pollies in the past and never had a straight answer. what return has the taxpayer derived from the tax dollars spent on tertiary education.

    I mean is it $2 for every $1.. fact is they dont know And if you cant measure it then you cant manage it.

    Same goes for Health Welfare. these dumbarses have no idea of the return.

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  26. GJM (62 comments) says:

    GD,
    I completed a Masters full time for 2 years at the age of Thirty mumble. I had the full support of my family and parents, and I couln’t have done it without them. I also had a scholarship (Thank you NZ Fire Service – couldn’t have done it without you). I finished with a $27k student loan – no student allowance for me as my wife was working, I was 1000km away but the system couldn’t handle that, so despite having 2 houses to support, no help there. Due to a less thanminimum wage family income, we had some help from Winz, but no more than anyoen else with the same income.
    I pay $10k PA more tax now than I did before, and also bring in a few export dollars, so it has been a pretty good investment for the taxpayer. I don’t like the student loan, but it had a positive NPV…

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  27. iiq374 (262 comments) says:

    While I’m generally not in favor of student allowances; if they are to remain it is preferable that they are universal. Certainly the current system of tying to parental income is completely inequitable.

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