Release Date: 31 October, 2016
Replacing student fees and debt with a Graduate Tax
‘The students are coming!’
WhatsApp pictures had alerted staff to students marching towards the Wits Business School during my visit last week as a Visiting Professor, and I made a hasty exit to avoid being locked in.
The student radicalism almost made me nostalgic for my own militant protestor days against the Springboks 45 years ago.
It also reminded me of England’s system of student fees and university finance which is unfair, discriminatory and dysfunctional. (Wales and Scotland have different policies but much the same applies there too.)
My answer is to replace it with a graduate tax – a small addition to income tax paid by all graduates during their working lives.
The no-fees demand from some protesting students ignores the reality that South Africa, more than England, has other much greater and pressing priorities for public spending, not least because a university degree is a privilege and normally leads to higher earnings.
It also ignores the reality that there are so many more students than in the past – over 400,000 since apartheid ended.
The dispute is nothing to do with ‘decolonisation’ as I heard some angry students claim. It is about tough choices: for government, for universities and for students themselves.
Quite apart from being unfair and discriminatory to all but students with the richest parents who pay off the fees anyway, the current system of tuition fees in England is unsustainable. Students are emerging from universities with mountainous debts, preventing them getting loans for cars or houses, and universities are increasingly short of funds. It seems to me the same is true of South Africa.
English fees are over R160,000 annually and are a serious disincentive for some to go into higher education, especially those who are poor or mature.
Nearly half English students default on repaying their fees, increasing government borrowing and debt. Which is supremely ironic, because reducing public spending was the intention of the Tory/Lib Dem Government in 2010 which effectively privatised university teaching with an 80 per cent budget cut that transferred the cost from taxpayers to students and their families.
It has been estimated that around the midpoint of this century, when the UK’s 30-year Treasury rule kicks in and the debt is written off, fully £90 billion of the £200 billion student support funded by the Treasury would remain unpaid.
That is a colossal waste of the very public expenditure that the British government is ideologically fixated with cutting, and which could have been directed at vital public projects like social housing, schools, hospitals and railways – or, for that matter, universities.
Other research shows that English taxpayers now spend £7.50 on debt cancellation for every £1 they spend on teaching students.
Meanwhile university capital spending has been severely cut and in consequence more universities have been plunged into greater debt to finance the investment they require.
This high-fee, high-debt cancellation English system actually forces up fees and waste. The system is unsustainable and damaging to Britain’s long-term economic let alone social ambitions.
So could the current English system of funding university fees (and also student maintenance loans) with a tax paid by graduates be fairer and better?
In England – and by extrapolation South Africa – let’s assume that there is no alteration in the real value of money received by universities from the Treasury, and there are no changes in student numbers.
The only detailed English studies currently available come from the Million+ higher education think tank. Its 2010 study estimated that a graduate tax of 1 per cent could be adequate. But the figures rose sharply with the 2010 trebling of English fees, as a more recent Million+ study showed.
It looked at replacing the current English funding system (including the repayment of both fees and the maintenance loans which are provided), giving two options for 30- and 40-year repayment periods. It made calculations on the basis of abolishing the current fees system in the future, and also repaying maintenance loans.
Resolving the fees dispute is vital, not just for students and universities, but for the country.
Graduates would make a contribution based on their salary, with the rate of tax rising across bands in much the same way that income tax already does. Nothing would have to be paid on earnings up to R180,000 per year. Earnings between R180,000 and R440,000 would attract an extra tax rate of 2 per cent, then 2.75 per cent applied to earnings between R440,000 and R750,000. Earnings above that would be taxed at 3.5 per cent.
It would be perfectly practical for the Inland Revenue to implement such a system, and the economic costs to government would be less. It would be much, much simpler – involve far less costly bureaucracy – and undoubtedly fairer. It seems certain that graduates would prefer a graduate tax over the current system which involves them in a greater cost, saddles them with debts damaging their financial credibility and is unjust.
The clincher surely is that the new tax rates involved will all feel very much lower than what is paid now by students in England, and thus remove the disincentive effect to enter university. Again surely the same would apply in South Africa?
Those in England earning between around R180,000 and R370,000 annually would pay extra 2 per cent tax, whereas under the present system such graduates pay back nothing at all until their pay exceeds R370,000, when they face a jump to an equivalent extra of 9 per cent because their fees debt is subject to an interest rate charge.
Compare even the highest graduate tax rate of 3.5 per cent which would be paid on earnings greater than R750,000 with the high 9 per cent now paid by former students in England earning over R370,000.
Foreign students would continue to pay fees of course.
A graduate tax would offer a more sustainable stream of revenue for the Treasury than currently and thus be more fiscally responsible. Above all graduates would be in a much better place than they are now. So would their families and the whole country. So would universities.
In my view it’s a no-brainer. Certainly for Britain, and probably for South Africa too. Maybe Finance Minister Pravin Gordhan and University Minister Blade Nzimande could look at the policy urgently and discuss it with student leaders and university vice-chancellors?
That way the student unrest could end, universities would be financially secure and South Africa would then be free to confront fierce global competition.
There are 7.5 million new Chinese graduates and 7 million new Indian graduates every year. South Africa has 180,000. Of course it’s a much, much smaller country, one-twentieth their size. But proportionately South Africa produces half their annual graduate numbers.
Never forget that South Africa is being undercut not just on low cost, but on high skills and quality. And not just by these two economic superpowers but by many other countries. Resolving the fees dispute is vital, not just for students and universities, but for the country.
Peter Hain’s childhood was in Pretoria until his South African parents’ anti-apartheid activism led to their exile in 1966 where he became a British anti-apartheid leader and then MP and Labour Government minister. He is now in the House of Lords.