Test the assumptions before tightening your belt

Test the assumptions before tightening your belt

The Parliamentary Budget Office thas taken it upon itself to repackage government data about the cost of education in some creative new ways, writes Richard Denniss.

This week the Parliamentary Budget Office released analysis that suggests mortgage interest rates will soon rise to 8.5 per cent, an increase that would cost a household with a $500,000 mortgage around $15,000 per year. But no one noticed and no one panicked. We were too busy blaming university students for making governments 'live beyond their means'.

In order to scare people about the 'cost' of investing in the education of the young the PBO took it upon itself to repackage government data about the cost of education in some creative new ways.

The PBO is assuming that students are going to face a 40 per cent increase in the cost of going to university.

The PBO is assuming that students are going to face a 40 per cent increase in the cost of going to university.Credit:Rob Homer

The collapse of Enron should have taught all journalists that 'creative' and 'accounting' are words that can make an explosive combination. Likewise, you would think that the recent debacles in Australia with economic modelling claims collapsing as soon as their assumptions are examined would make people a bit more sceptical when economists wave big scary numbers around. Remember BIS Shrapnel's attempt to estimate the impact of changes to negative gearing? The lesson hasn't sunk in yet, it seems.

Assumptions matter, and to their credit the good folk at the PBO list their assumptions quite clearly at the back of their paper. That said, if they had said up front in their summary that they assumed that interest rates would more than double over the next eight years, perhaps more people would have asked how likely that was.


If you assume that interest rates are going to rise rapidly, it is hardly a surprise that the interest payable is going to rise rapidly. Surprising or not, the PBO paper certainly gave the government and the conservative commentariat a nice new opportunity to express concern that the government needs to 'live within its means' this week.

In the lead up to the budget there is nothing like a 'cost blowout' story to give a government the opportunity to tell us we all need to 'tighten our belts'. And so it was with the headlines created by the PBO report. Young people, it seems, have had it too good for too long. Tough decisions will need to be made. I bet no one tells the wealthy retirees that.

While the headlines following the release of the PBO report suggest a generous system in crisis, the reality is that the 'blow out' is caused by both the questionable assumption that interest rates will double and – wait for it – the decision to jack up the prices of university degrees, which will jack up the level of debt that young graduates will incur.

But don't take my word for it, the PBO make clear in their report that "The size of the HELP loan portfolio is projected to grow rapidly through to 2025-26, driven mainly by projected increases in student fees from 2017 due to the announced higher education reforms. The PBO projections assume that universities will increase their fees to recover the reductions in subsidies under the Commonwealth Grant Scheme. This will require an average increase in fees of 40 per cent for students affected by the changes."

Did you get that? In addition to assuming big increases in interest rates the PBO is assuming that students are going to face a 40 per cent increase in the cost of going to university. And because their fees are going to be so much higher, guess what? Their HECS debts are going to be a lot higher as well.

Australian public debate is so broken – so filled with econobabble – that the government is saying that it, like households, must 'live within its means' while simultaneously forcing young people to incur massive debts if they want a good education.

It gets better. Close readers of the above quotation might have been surprised to see that the reason that university fees are set to rise is because universities are expected to increase student fees "to recover the reductions in subsidies under the Commonwealth Grant Scheme". So a government decision to cut spending on universities and allow universities to gouge 40 per cent more out of students is going to "put pressure on the budget"? Confused? You should be.

Like their assumption that interest rates will double, the PBO state quite clearly that they have diverged from standard accounting practices in putting their scary numbers together. While they might think that their creative approach to repackaging data and reinterpreting accounting concepts helps to shed new light on an old problem, this reader disagrees.

Take the way the PBO show how student debt accounts for a significant and rapidly rising proportion interest payable on government debt. In describing one of those scary graphs of government debt rising, the PBO assert that "The proportion of Australian Government public debt interest required to finance outstanding HELP loans is projected to increase from 15.4 per cent in 2015-6 to 46.3 per cent in 2025-26".

Did you get that? Nearly half of the government's interest bill in 2025 will be the result of this one government policy. Scary huh. But what the PBO don't tell us is what buying $50 billion worth of submarines will do to the government's interest bill in 2025, or the $100 billion cost of the joint strike fighter, or the cost of refusing to rein in the $30 billion per year in tax concessions on superannuation.

The federal government spends more than $400 billion per year. It is misleading and unhelpful to take an individual policy and suggest that it alone is responsible for the proportion of the budget deficit or the stock of debt.

Young people in Australia are getting a raw deal. As Jennifer Rayner points out in her new book Generation Less – How Australia is Cheating the Young, they are expected to pay high prices for their education and high prices for their homes. Bizarrely, older workers pay lower rates of income tax than younger workers (thanks to the Senior Australian Tax Offset). And while most people now realise the inequity of millionaire retirees paying zero income tax, few people realise that those same millionaires don't even have to pay the Medicare or NDIS levy. How's that for user-pays?

This furore this week over the "cost" of educating our young people provides a clear example of the way that debate about our national priorities is skewed by those with access to most information and by those with the most time on their hands.

Investing in education, be it schools or universities, is one of the best ways to boost productivity growth and one of the best ways to create an innovative culture. But instead of admitting that we are placing a growing burden of the cost of education on the young, we are debating how to reduce the burden they place on us.

Dr Richard Denniss is chief economist at the Australia Institute. His latest book is Econobabble: How to decode political spin and economic nonsense.

Twitter: @rdns_tai

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