Study Now, Pay Later? Please Read the Terms and Conditions.

Posted on behalf of Darragh Flannery (UL) and John Cullinan (NUIG).

The Cassells report was finally published last week with various options for funding higher education outlined. With the dust settled, now may be an appropriate time to take stock of a few important issues. The debate around this topic has largely taken a full state funding approach versus a student loan approach. The student loan scheme suggested as one option within the report is an Income Contingent Loan (ICL) system, whereby graduates borrow for the costs of their education from the State but do not make any repayments towards this debt until they reach a certain income threshold. However, the discussion around this option has been muddied a lot within the debate. There are a variety of student loan systems in operation around the world; some good and some bad. The point of this post is to simply summarise some of the key design parameters within an ICL scheme and highlight the implications of varying these parameters. These have rarely featured in the public debate but can have significant implications for graduates and will thus require deep consideration if an ICL scheme is to be seriously considered.

Firstly, it must be noted that an ICL scheme entails that some students may never pay back any of the debt they owe. For example, if somebody leaves third level education and chooses not to work for the rest of their life, they repay nothing.  In this instance, the taxpayer would ultimately foot the cost of this individual’s education. From an efficiency viewpoint this makes sense as it provides a system where there is burden sharing at its core.  Students that benefit from third level education through higher earnings pay back some of the cost of that education. Society pays through taking on the default risk of those that do not repay fully or anything at all; this particular point seems to have been completely lost in the debate recently. From an equity viewpoint, an ICL scheme provides free access to higher education at the point of entry to every young person in the country.  It has been argued that this is the same with a household mortgage style loan system – the house is free at the point of entry but you pay for it over the next thirty years or so. However, the key difference is that under an ICL system, if an individual makes no repayments due to some spell of unemployment, nothing is repossessed and there is no impact on your future credit worthiness. From both an efficiency and equity viewpoint it can therefore be argued that there is some sense in an ICL system. However, like any change in policy, the devil will be in the detail.

Two separate studies have previously looked at this issue for Ireland, my own ESR paper with Cathal O’Donoghue here and more recent work by Aedín Doris of Maynooth University and Bruce Chapman of Australia National University here. Also, the appendix of the Cassells report presents some sensitivity analysis around certain parameters. While these go into much finer detail around the issue of ICLs, we will simply summarise some of the key parameters and highlight why there are important. These include the debt liability imposed on students, the specific income threshold to be set, the interest rate attached to the loans and the possible capping of repayment burdens.

The first issue that would have to be addressed is the level of debt a student is burdened with for every year they are in higher education. This has to strike a balance between having the ability to provide adequate funding for the third level institutions and not proving extremely burdensome for graduates. This can take the form of a blanket fee for all those attending higher education as outlined in the Cassells report; however, a more efficient way would be to have some variation in this debt across students. This could be linked to the cost of educating the student and/or the potential lifetime earnings from pursing different subject fields. Australia has adopted a system of this type whereby those wishing to study subjects that generally provide a higher return in the labour market such as medicine and dentistry face a slightly higher debt burden compared to those studying in fields such as humanities or nursing.

To be seen as progressive an ICL must have an income repayment threshold that reflects the fact that only those that benefit from third level education should be responsible for some of the cost. The danger of setting the threshold too low is that it places an extra expenditure burden on those graduates that are not earning very much, despite having gone through four years of higher education. Australia has set the threshold at which graduates begin to repay their debt at the average industrial earnings. The Cassells report mentions a lower threshold of the average wage of new graduates; presumably to ensure more graduates pay something towards the cost of their education.

With regard to the interest rate, the level at which this is fixed will help determine both how long it takes for graduates to pay off their debt and the overall state subsidy. An interest rate that is lower than the rate of inflation may significantly increase the subsidy the state provides on the loans by allowing graduates to ‘inflate’ away their debt. If the interest rate is set too high, the debt burden may increase rapidly and lead to longer repayment periods for graduates. A sensible approach would be to either index the interest rate on the loans to the consumer price index or the state cost of borrowing.

Capping the repayment burdens of graduates on an annual basis has seldom arisen in discussion but would form an important part of illustrating the difference between an ICL scheme and personal loans from the banking sector. Such a mechanism would limit the repayment amounts any one graduate may face in a particular year, no matter what their income level is. For example, if a graduate earns well in excess of the repayment threshold of the system, the repayments they make in that year are capped at a certain proportion of their income. Bruce Chapman of Australia National University, the architect of the much referenced Australian ICL system, suggests that this helps to avoid unduly harsh repayment burdens in any given period and could be fixed at around 8-10% of a graduate’s income.

Arguments have been put forward that increased funding for higher education should be provided through increased general taxes, as is seen in some European countries. The Cassells report acknowledges this by outlying two alternative funding options whereby state funding to higher education would be increased significantly and either the student contribution fee would be removed or maintained it at current levels.  However, given the suggestion that an additional €600 million euro per annum is needed in the higher education sector to meet the current demographic and quality challenges, it is highly unlikely either of these options is feasible or desired politically.

There are other important issues within an ICL system that deserve more attention than I have scope for here. These include the potential impact of emigration on repayments and whether the higher education grant system is restructured concurrently. However, for the majority of graduates that may be impacted by such a reform the specifics of debt amounts, income thresholds, interest rates and the capping of repayment burdens are of huge importance and require careful consideration by policymakers. They also deserve more consideration in the public debate around higher education financing.

Preliminary Census Results

The CSO have published some preliminary findings from last April’s Census.

The population was measured to be 4.76 million up from 4.59 million in 2011 giving an increase of 170,000 (+3.7%).  The natural increase was just over 198,000 so the estimate of net migration over the five years since the last census is –28,500.  This is the second consecutive occasion where inter-censal population estimates were out by around 100,000.

The housing stock increased from 2,003,914 to 2,022,895, a rise of less than 20,000 over the five years.  On census night just over 1.7 million units were occupied with 45,000 units where the occupants were temporarily absent and there were 60,000 unoccupied holiday or second homes.  There were just under 200,000 “other vacant dwellings” a drop of 30,000 in this category since 2011.  There is a wide variation in vacancy rates by area.

There is plenty of interesting detail available by following the link.

The Irish National Accounts: Towards some do’s and don’ts

The statistical distortions created by the impact on the Irish National Accounts of the global assets and activities of a handful of large multinational corporations have now become so large as to make a mockery of conventional uses of Irish GDP. I suggest four preliminary remarks to help overcome some of the challenges facing observers of the Irish macroeconomy.

  1. GNP is now almost as unhelpful an aggregate economic measure for Ireland as GDP. (This is due to a change in the way in which some globalized countries are managing their affairs, with some significant global headquarters now being located to Ireland)

  2. Ratios to GDP are now almost meaningless for Ireland in most contexts. They need to be supplemented by alternative purpose-constructed ratios for specific uses, as the Irish Fiscal Advisory Council already proposed a few years ago with its weighted average of GDP and GNP for assessing fiscal sustainability – though that particular solution will no longer work well for the reason mentioned in point 1.

  3. International statistical conventions should be revisited to help the interpretation of the data in a world where huge MNCs, legally controlled from small jurisdictions are moving assets around on this scale.

One natural approach is to apply the thinking underlying the current statistical treatment of financial intermediaries to this kind of MNC.

(One aircraft leasing firm that publishes its accounts has just 164 employees in Ireland – and just 221 elsewhere – but a balance sheet total of $44 billion, the bulk in the form of aircraft that are operated by other firms. I do not know how the statisticians classify it, but in economic terms it looks much more like a financial firm than a non-financial firm).

Failing international convention changes, it may be necessary to envisage a parallel set of accounts being also prepared for the Irish economy.

  1. Some of the big aggregates of the national accounts are largely unaffected by the distortions. For instance, the figures for personal expenditure on consumer goods and services and for government expenditure on goods and services. These two series can still be used to get a more realistic picture of the recovery as it is felt in public and private consumption. But they should not be expressed as a percentage of GDP, but instead in real constant price terms, seasonally adjusted.

Thus, by the first quarter of 2016, personal expenditure was still just below its quarterly peak of eight years ago; it has been growing for twelve quarters since the trough at an annual average rate of 3.5%.

Government spending on goods and services (i.e. not including transfer payments) in the first quarter of 2016 was still six per cent below peak but has grown by 4.0% per annum on average in those twelve quarters.

Personal disposable income (a much under-used series; up to date figures not available yet); other elements of the government finances; building and construction investment are other series that remain valid and usable for understanding the relevant parts of the economy.

How do these recent growth rates in consumer and government spending compare with those registered in the decade before the bust? Much lower of course: consumer spending rose by an average of 5.6% per annum 1998-2008, and government spending by 4.9%. Recovery yes: boom no.

Spending

Sports Economics Workshop – Full Programme

Friday 22nd July 2016. Cavanagh Pharmacy Building, University College Cork.

9.45 Registration

9.55 Opening Address – David Butler

10.00 Session 1 

  • Dr Declan Jordan (University College Cork) – Power and place – the capital city effect and performance in European leagues from 1992 to 2015.
  • Fionn Fitzgerald (IT Tralee) – How important are physiological, anthropometric and psychological measures for talent identification in Gaelic football?
  • Prof Robert Simmons (University of Lancaster) – Special Ones? The Effect of Head Coaches on Football Team Performance.

11.15 Refreshments

11.45 Session 2

  • Prof Paul Downward (Loughborough University) -‘No man is an island entire of itself.’ The hidden effect of peers on sport and physical activity.
  • Pat Massey (Compecon) – Measuring Efficiency of the Republic of Ireland International Football Team: A Production Frontier Approach
  • Dr John Considine (University College Cork) – Radical Competition Structure Change and Competitive Balance.

13.00 Lunch

14.15 Keynote Address

  • Prof Rodney Fort (University of Michigan) – ‘The Future of Sports Economics’

15.15 Round-table Discussion

  • Coaching for Participation or Elite Development – A Challenge for Instructors? Discussants: Dr Elish Kelly (ESRI), Greg Yelverton (FAI), Dr John Considine (UCC) & Prof Paul Downward (Loughborough).

16.00 Closing Address – Dr Robbie Butler

This workshop is free to attend and open to the public. The event is funded by the Irish Research Council Government of Ireland “New Foundations” Scheme. Register for the workshop here.

The farce of Ireland’s national accounts: let’s go plane watching!

Wow! Exports are up 34%; Investment is up 27%; imports are up 22%. Wham, bam, the economy grew by 26%. Sensational. Per capita income per person in employment has increased from a whopping 88k in 2010 to 130k in 2015. I’m sure you can feel the booming economy in your pocket? Of course you can’t, the national accounts are a sham.

So what’s really going on?

The increase in investment, although you can’t see it in the national accounts, is being driven by airline leasing. My hunch is that this has increased by about 110%. Airline companies of the world are effectively transferring their financial activities (as new aircraft machinery) into Ireland for tax purposes. As a student of mine nicely put it: imagine all those massive Boeing planes flying around the world, then imagine them in Ireland, and hundreds of people working on them. Where are they?

In truth. We couldn’t even fit these planes in Ireland. It’s just around 20 people managing a financial fund for tax avoidance purposes. Then using the generated money for profit redistribution. That’s what’s really go on.

The increase in exports, although more real, and somewhat more complicated, is a result of a similar dynamic. It’s large corporations transferring assets and IP patents into Ireland – with no real connection to employment – and then booking it as real investment, for tax purposes. There can be no doubt Ireland has an export-led economy, and this is being driven by US FDI. But these massive jumps in growth are not linked to real goods/services. They shouldn’t be in the GDP figures.

The 26.3% makes for a great media headline. But if the media want to go find this growth, they might as well go plane watching at Dublin airport. It’s a farce. There is simply no credibility to the national accounts. Most serious observers looking in at Ireland, know this. And this is what should really concern the government and civil servants.

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