The Hunt Report, and how to close the deficit

Michael Burke11/01/2011

Michael Burke: There are many shortcomings in the Hunt Report ‘National Strategy for Higher Education’ – but one thing that’s very useful.

It's a shame that the authors have published a Report which cites the OECD Education At A Glance 2009 as the latest offering (p. 19). Just one month after the date of this draft report, EAAG 2010 was published in September 2010.

The accompanying press release for the later OECD study highlights the main theme of that report, titled 'Governments should expand tertiary studies to boost jobs and tax revenues'. Put another way: investment, not cuts.

The useful function performed by the Hunt Report is to highlight the relationship of this sector to the overall economy. We are told repeatedly that deficit-reduction is the overwhelming priority of economic policy. This from a government which has seen the public sector balance swing from surplus to over 32% of GDP.
The Hunt Report recognises that greater investment in tertiary education is required but suggests that this should come in the form of higher fees. Yet nowhere is there an understanding of the impact that investment in tertiary education has on government finance. The authors should have seen this even in the OECD EAAG 2009 version. It highlights not just the individual benefit from investment in third level education, but also the boon to government coffers. The public cost of higher education in this economy is equivalent to US$18,520, the government return for a male student is $92,738, a fivefold return.

Of course that return takes place over the working life of the male student. Women fare worse primarily because their pay is lower. In a Republic worthy of the name, there would be proper equality between citizens, most especially between men and women. Understood correctly, government has a significant fiscal as well as moral incentive to enforce equal pay. Even so there is still a huge return from investing in women’s tertiary education, just under fourfold the initial outlay.

The returns to government arise from higher income taxes and social contributions, as well as a lower likelihood of unemployment and associated costs to the public purse. They could be higher still, with changes to the tax regime, and in any event the OECD does not take account of higher taxation revenues from the likely higher consumption funded by those higher incomes.

The chart below is taken from the OECD EAAG 2009, C_A.8.5. It shows the public costs and returns to investment in tertiary education for the OECD economies.

Blue = public benefits
Grey = public costs

So, there is an upfront cost and a long but very high payback to government investment in tertiary education (although breakeven must be around 8 or 9 years). But the OECD borrows an idea familiar to financial market operators to account for this; net present value (NPV).

The $74,219 return shown in the chart is the NPV for Irish public investment in tertiary education (male).

The NPV is where the future cashflows are discounted by a given interest rate, in this case 5%. On this method the public NPV of investment in tertiary education for a male is over $74,000 and for a female is over $46,000. Actual borrowing costs, even from the heavy mob from the EU are not much higher than this, and financial markets understand NPV, even if government and its advisers do not.

When fees were introduced in Britain, application numbers dropped the following year. Growth in applications has resumed since, but from a lower base and a number of surveys suggest those fees (set at the equivalent of about €4,200 per annum, and about to triple) act as a deterrent especially to students from middle and low income families.

Instead, as the chart shows, the government could invest in higher education in order to help close the deficit.

Posted in: InvestmentInvestmentInvestment

Tagged with: Hunt ReportEducationinvestment



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