Penny-pinching on education leaves the nation lagging

20 September 2017

By Stephen Koukoulas

Educational attainment is a proven path to higher incomes, not only for the individual concerned, but also for the nation as a whole.

The latest research from the Organisation for Economic Co-operation and Development, Education at a Glance 2017, shows that in each of the 38 countries in the survey, adults with below upper secondary education were paid an average 25% less than someone with upper secondary education. There was an even more extreme difference with a 56% average pay advantage for those attaining a tertiary education against upper secondary schooling.

Put together, this means that someone with a tertiary education will, on average, get roughly double the income of those with below upper secondary education.

The public policy implications of these findings should be obvious.

The first step should be to ensure that all children get fundamental reading, writing and arithmetic skills, without which completion of upper second education is impossible, let alone the step to tertiary education.

Targeted, sufficient and productive public investment in human capital (education) via skilled teachers and high level, up to date resources for students are a bare minimum. Any shortfall in this infrastructure to provide a good start to education will show up in a short fall in educational attainment in later life with negative implications for the economy.

The other policy response should be to frame the financial and other incentives so that all young people maximise their educational potential. Clearly, not everyone is going to be a rocket scientist, economist, historian, lawyer or accountant, but everyone should achieve their full potential.

It is important to note here that the definition of education, in a public policy context, includes trades training, reskilling workers made redundant due to technology and globalisation, and ensuring those with disabilities are able to participate as much as possible in the workforce. It encompasses all arms of increasing workforce participation.

Fees on education deter people from going to a technical college or university. Price signals, to use the economists’ jargon, act to either discourage people from undertaking a particular activity (high excise taxes on cigarettes deter tobacco consumption) or encourage more consumption (subsidised pharmaceuticals encourage people to buy and use medicine).

This interaction of price and demand is an economic concept that is taught even before students go to university.

It means that when the price of going to university increases, either through higher fees and/or a lower threshold after which those fees must be repaid, fewer people will undertake tertiary education.

And as the OECD study confirms, this will lead to under-educated individuals and will leave society having a workforce that is not operating to its full capacity.

Which goes to the current policy agenda of the government. Cuts to funding for education and higher fees might be good for the budget bottom line in the short term, but it poses huge risks over the medium to longer run, as the inevitable shortfall in the educational attainment of the general population undermines incomes.

Compared to the funding levels contained in the 2012-13 budget, government spending on schools has been cut by around $20 billion over the next decade. This will lead to the education system having fewer high quality teachers and less up to date facilities than otherwise would have been the case.

At the same time, the government has lowered the threshold at which university debt is repaid and simultaneously cut funding to universities which will necessitate a rise in fees.

Recall that those with a tertiary education earn double that of those who do not attain secondary schooling.

When it comes to education funding, there is an old saying that it is better to spend $1 too much and have it wasted than under-spend $1 and leave a student uneducated.

With Australia having over 725,000 people unemployed, yet having the business sector relying on foreigners to fill skills shortages through the 457 visa scheme, there is confirmation of underfunding and a sub-standard education system in years gone by.

Making matters all the more problematic is the assessment from both the Reserve Bank of Australia, and Treasury, that it is not possible for Australia to sustain an unemployment rate below 5% (around 650,000 to 700,000 people) without inflation pressures emerging. Inadequate skills are one reason for this.

While accountability and targeting of education funding, like all government spending, need to be tightly scrutinised, Australia needs an education system that not only allows but actually encourages every Australian to maximise their skills set, be that as a trained truck driver, cancer research scientist, electrician, lawyer or teacher.

Failure to do so will leave many people poorer and with it, the Australian economy less productive.

This article was first published in Crikey, 20 September 2017