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The strange accounting behind the proposed HECS changes

by Gareth Bryant on May 8, 2017

The strange accounting behind the proposed HECS changes

Gareth Bryant | May 8, 2017

Tags: Australia policy
Australia, policy
| 0 446

All is not as it seems with the Turnbull government’s proposed changes to higher education funding. The Conversation

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.

From government spending to financial asset

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.

Accounting for the politics of higher education

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

So why reduce the income repayment threshold?

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.

Co-written with Ben Spies-Butcher, Senior Lecturer in Economy and Society, Department of Sociology, Macquarie University. This article was originally published on The Conversation. Read the original article. Photo credit: Sean Davey/AAP.

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Author: Gareth Bryant

Gareth Bryant is a political economist at the University of Sydney. He works as a senior lecturer in the Department of Political Economy and as economist-in-residence with the Sydney Policy Lab.

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  • Home
  • About
  • Manchester University Press Book Series
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  • A Political Economy of Australian Capitalism
  • Journal of Australian Political Economy (JAPE)
    • Journal of Australian Political Economy (JAPE)
    • JAPE Issues
    • JAPE Submission Guidelines
    • JAPE Young Scholar Award
  • Australian IPE Network (AIPEN)
  • Forums
    • Forums
    • Debating Anatomies of Revolution
    • Debating Debtfare States
    • Debating Economic Ideas in Political Time
    • Debating Making Global Society
    • Debating Mass Strikes and Social Movements in Brazil and India
    • Debating Social Movements in Latin America
    • Debating The Making of Modern Finance
    • Debating War and Social Change in Modern Europe
    • Feminist Global “Secureconomy”
    • Gendered Circuits of Labour and Violence in Global Crises
    • Scandalous Economics
    • The Military Roots of Neoliberal Governance
    • Politicising artistic pedagogies
  • Literary Geographies of Political Economy
  • PPExchanges
  • Pedagogy
    • IPEEL Of The Environmental Crisis
    • Five Minute Honours Theses
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    • Radical Economics Pedagogy
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    • Marxism Reading Group
  • Wheelwright Lecture
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    • PHD in Political Economy
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