The Economic Wishing Well: Education, Part II

Following the announcement little over a week ago that university fees in South Africa would remain unchanged for 2016, further calls have been made for tuition fees to be scrapped entirely and for government to cover the costs. Several articles have emerged over the past week – some claiming that with a bit of tweaking to the national budget, this is possible, while others have rejected such notions. In light of some of the implications discussed in the previous article, and the likelihood of free education dominating public discourse in future, it is worth taking a fresh look at this issue.

The cost of ‘free’ education

For the current financial year, the National Treasury’s estimated expenditure on universities is R32.844bn. Some 40% of universities’ incomes are sourced from the government, while 31% comes from student fees, with the balance made up by private sources. For the government to cover student fees as well, they would need to increase their university budget by 77.5% – a significant increase, particularly if taken on as a permanent commitment. For the past year, this means that the government would have had to allocate R58.3bn to universities. Taking into account the average rate of education inflation over the last 7 years of around 9%, the government would have to provide over R63bn for university tuition in 2016, all other things equal.

Of course, as was highlighted in the previous article, ‘all other things equal’ is a bold assumption – after all, part of the objective in scrapping fees is increased access to tertiary education. It is not prudent, therefore, to account only for the numbers of students currently in the system when projecting potential costs into the future. The Centre for Higher Education Transformation found in 2013 that over 2.7 million South Africans between the ages of 18 and 24 were neither employed, nor in training, nor in an educational institution[1]. If the case for accessibility is made – as it has been repeatedly – then surely the successful implementation of free university education would have to include accommodating many more students.

While in name, 10 ‘new’ universities (of varying status) have sprung up in South Africa since 2000, 9 of them were formed by consolidating existing institutions. The only university among these to have been built from scratch is Sol Plaatje University (SPU). In 2013, the National Treasury allocated R2bn over four years for the construction and operations of this university, as well as building upgrades for the University of Mpumalanga. This year, SPU enrolled a mere 370 students. With so little past data, it is difficult to estimate what the costs would be for establishing additional, large institutions – but if the experience of SPU is anything to go by, the associated financial prospects seem precarious.

Of course, the issue of government’s own sources of funding for such projects must be addressed. In their research, the Institute of Race Relations (IRR) outlined several adjustments to national expenditure which could facilitate a free tertiary education policy for the numbers of students currently in the system. However, one must also take into account the political will required to implement such recommendations; part of what the IRR proposes is a 5% reduction in the governmental wage bill, for example. Whether through salary reductions or retrenchments, this is unlikely to occur.

More often than not, ‘higher taxes’ is the popular solution sought for such budgetary shortfalls. Just recently, the Human Sciences Research Council (HSRC) proposed the implementation of a wealth tax – as if the progressive taxation system in South Africa was not already geared towards disproportionately extracting revenue from the wealthy. Moreover, one can imagine that wealthier South Africans will only tolerate threats against their property for so long before significant capital flight takes place – a wealth tax to fund education is yet another such threat. Certainly, this is a whole topic in its own right and could be discussed at length. At the very least, we should be aware of the possible ramifications of such policies.

Remarkably, nobody has pointed out the possibility of higher tax revenues resulting from lower tax rates – a phenomenon depicted in the well-known Laffer curve (shown above), but nonetheless observed empirically. This was exactly the point made by financial services firm KPMG in early 2014. Indeed, revenues would take a hit in the short term, but two subsequent effects would result in greater tax revenue in the medium and long term. The first is behavioural – generally, tax avoidance, arbitrage and evasion would decrease. The second is the more significant economic effect: increased saving and investment and, consequentially, economic growth.

Unfortunately, the idea of lowering tax rates to raise more revenue goes against both the intuition of the average person and the ideological objectives of the Left. When confronted with this matter during a 2008 Democratic debate, for example, then-Senator Obama was more concerned about people paying their ‘fair share’ than he was collecting more revenue to strengthen welfare programs. In prescribing higher tax rates, the head of the HSRC was quoted as saying, “The principle must be implemented of paying according to your ability.” At this point, it is not unreasonable to wonder whether such learned individuals – who undoubtedly would have come across the Laffer curve – are more interested in using taxation as a punitive measure against the wealthy than they are in using it to ‘get things done’.

Whether the focus is on costs or funding, these issues are far more complex and multi-faceted than many realise – this is especially true of tertiary education in South Africa. There are no clear-cut solutions, particularly when it comes to the heavy hand of the government. As at the end of the last article, now is perhaps a good time to consider the words of a great economist – this time, those of F.A. Hayek:

“The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

[1] This is obviously not to say that all 2.7 million are prospective university students, but the reader should hopefully be able to infer that a large portion would feasibly be eligible. Furthermore, the more alert readers may notice the discrepancy with another figure supplied in the last article; the figure used here highlights the South Africans between those ages who are certainly and effectively idle.