Why I don't feel sorry for fee-paying students

I have my heroes among leading American economists and psychologists, some of whom I know. One I don't is Alan Blinder. But when he wrote a book called Hard Heads, Soft Hearts, I knew I'd found my guiding star as an economics writer.

There are plenty of lovely souls whose heart bleeds freely for all manner of people who want us to believe they're being treated badly.

But hanging around with economists has left me imbued with the harsh reality of opportunity cost, my version of which says you can have anything you want, but you can't have everything you want. So be careful deciding.

The hard-headed truth is, feeling sorry for almost everyone is little different from feeling sorry for no one. I have only so much compassion to go around.

So, sorry, but among all the people claiming to have been hard done by in this month's budget, I don't have much sympathy to spare for the university students complaining about the increase in their debts.

By contrast, I have much sympathy for all those unemployed people hoping and searching for jobs that don't exist – unless, of course, the government's own figures for job vacancies are grossly understated.

Had industrial fate not intervened to prevent me attending my 43rd successive budget lock-up, I planned to wear my jumbo size JOB HUNTER NOT DOLE BLUDGER T-shirt, put up to it by friends at the admirable Brotherhood of St Laurence.

How prescient that would have been. The budget turned out to include an attempt to traduce the reputation of all job hunters by launching the government's umpteenth Crackdown on the Crackdown on all those "leaners" who lounge about taking drugs when they should be out pounding the pavement.

Did you know that some people are being given the dole before any savings they have are completely exhausted? It's an outrage on us upright citizens, groaning under the weight of massive taxation.

Isn't Centrelink bright enough to understand that forcing the jobless to go cap in hand to the Salvos whenever some large and unexpected expense occurs is part of their punishment?

Not content with cracking down on the unemployed, this budget cracks down on those lazy loafers at Centrelink. Do you realise there are days that pass without people on benefits being harassed in some way?

Do you realise that older people, some just a few years from pension age, aren't hassled nearly as much as young people are? It's wrong, it's discriminatory, and the ironically named Christian Porter and his hardworking sidekick Alan Tudge are just the punishers and straighteners we can trust to stamp it out.

I don't understand those two. Do they enjoy beating up the poor, or is it a hateful job they must do to keep their jobs in the ministry, to gratify all those pathetic voters desperate to feel morally superior to someone?

Nor do I get Malcolm Turnbull. He produces a surprisingly good budget intended to convince us he's not the pale imitation of Tony Abbott we thought he'd become, that the Coalition is committed to fairness after all, but can't resist adding the most lurid attempt to stigmatise anyone of workforce age who can't find a job.

Is Turnbull that much in fear of losing votes to the Redheaded One? Malcolm, you're a rich man, you don't have to sink so low.

(But let's not have too much righteous indignation from the Laborites. They're the crowd who went for six years without affording a significant discretionary increase in our pathetically low unemployment benefits. Perhaps they had to spend too much trying to prove they could punish asylum seekers with just as much relish as the Liberals.)

Back to the revolting uni students. You'd never know it from their cries of woe, but Education Minister Simon Birmingham has thrashed them with a pillow.

Their tuition fees – and hence their debts to the government - are being increased by just 7.5 per cent on top of indexation to consumer prices, spread over three years. When fully implemented, this will increase total fees for a four-year degree by between $2000 and $3600 – with that range roughly aligned with the likely earning-power of the particular degree.

We keep being told that the level of income at which people with debts begin having to start repaying them has been lowered from $52,000 a year to $42,000. What we're rarely told is that the bottom rate of repayment has been lowered from 4 per cent of their income to 1 per cent.

Combining the two changes, the time it takes to repay loans will increase by less than a year.

Uni students come mainly from the comfortable middle class and go to uni to get a certificate that pretty much guarantees them a well-paying job, including a much lower risk of becoming unemployed or staying jobless for long.

It's true the wider public benefits from the money governments spend educating people to graduate level, but equally true that the personal benefits to the particular graduate are about as great.

On average, Birmingham's changes will increase the graduate's share of the cost of their degree from 42 per cent to 46 per cent – and, thanks to the unchanged design of the loan scheme, do so without discouraging students from poor families from bettering themselves.

Sounds fair enough to me.

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Labor-like budget ticks all the boxes for Turnbull

For students of the politics of economics – my special subject – this clothes-pinching budget has been a feast. Oh no, it's "Labor-lite". Shocking!

Actually, it's a budget that ticks all the boxes for Malcolm Turnbull and, by extension, his parliamentary followers – something their silent acquiescence suggests they realise.

You don't need brains to see a Labor-lite budget. What's harder is to see that it's not as out of character as some suppose.

True, the song Turnbull and Scott Morrison are singing now is very different to the one they sang in last year's budget.

But the beginning of wisdom is to see that, these days, what each side of politics offers is an ever-changing mixture of ideology and pragmatism.

The bedrock is pragmatism: what must I say or do to win the next election? Pragmatism rules because of the way politics has been professionalised, becoming a career ladder you climb from newly graduated ministerial staffer to (you hope) prime minister.

But ideology has its uses. Mainly, to gratify the prejudices of the party base and enhance your supporters' loyalty to the tribe. It gives then a warm feeling. It also helps to jolly along union or business donors.

Then there's the third, usually unmentioned factor: Consistency, no need for.

When you're constantly changing the mix, increasing or decreasing the pragmatism component, you can't be too worried about getting caught changing your story from what you said before.

Since the responsibilities of office change little from year to year – similarly, the advice of the econocrats – the two sides' rhetoric while in government is more similar than when they're in opposition. Everyone changes their tune when they come to power.

As for the boxes this year's budget ticks for Turnbull, the first is it shows him taking firm steps to get the trajectories of budget spending and taxing heading in a better direction, giving the budget substance at a time when its forecasts and projections would soon be exposed as optimistic, even fiddled.

It shows Turnbull having the sense to cast off the wishful ideology foisted on him by the economically uninterested Tony Abbott (egged on by the Business Council's lesser geniuses, to whom he foolishly outsourced the commission of audit) that, despite eight income tax cuts in a row, only cuts in spending were needed to get the budget shooting back to surplus.

By doing so, Turnbull was accepting the budgeteers' orthodoxy that budget repair always involves tax increases as well as spending cuts, and joining ranks of all previous successful Liberal prime ministers, starting with John Howard and his goods and services tax.

Nor is Turnbull the first PM to succeed partly by pinching the best of their opponents' policies.

Second box: it shows Turnbull coping with the bills left by Labor – the National Disability Insurance Scheme, schools funding and (eternally) Medicare – in ways that are politically shrewd and not terribly distorting economically.

Solving the NDIS cost problem by linking it to a barely perceptible increase in the Medicare levy in two years' time. Switching to a cheaper version of Gonski-style needs-based school funding. Imposing a new $1.5-billion-a-year indirect tax on the hated big banks – for whom he's been leaking votes by running cover against a royal commission – to help reduce the structural budget deficit.

Third box: this budget neutralises two of the greatest areas of voters' concern, where Labor is permanently perceived by them to have the comparative advantage: health and education.

And this at a time when, largely thanks to factors beyond their control, we're not travelling too well in the areas permanently perceived by punters to be the Libs' comparative advantage: managing the budget and managing the economy.

Fourth box: this budget takes a Liberal party drifting ever-further to the hard right, and yanks it back to the sensible centre, where elections are won.

Fifth box: this budget shows Turnbull as leader rather than follower of his ever-more reality-detached backbench.

It at last gives voters a glimpse of the fair-dinkum Malcolm – the one saying what we all know he really believes – and whom many people whose vote is up for grabs were hoping and expecting to be led by after the unlamented demise of Abbott.

Last box: Turnbull's return to the centre has at last wrong-footed the formerly sure-footed Bill Shorten, exposing his pretence of putting the public interest ahead of partisan advantage – if we can't have our version of needs-based school funding, let's block the Libs' version – and prompting him to shift to left of centre, with his plans to increase taxes on high income-earners.

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How needs-based school funding would work

In education economics, the hot question is whether Malcolm Turnbull's Gonski 2.0 plan for school funding yields a better and more cost-effective combination of fairness and economic efficiency than Labor's Gonski 1.

Since both sides of politics seek to sanctify their funding approach by labelling it with the sacred name of David Gonski, the businessman who chaired the 2011 government inquiry into school funding, remember both sides' plans fall well short of what he recommended.

He started by recognising that, at least since the Whitlam days, government funding of the nation's schools had no rational basis.

Funds came from both federal and state governments, and were spent on three differing sectors – government, Catholic "systemic" and independent schools.

This meant funding differed by state, and by sectarian status. Politicians on both sides and at both levels did special deals aimed at currying favour with Catholic voters. Many governments favoured non-government over government schools, in the name of giving parents greater "choice" (provided they could afford private school fees).

In other English-speaking countries, religious schools get no special treatment. If they want government funding, they play by government rules. If that's not acceptable, they can do their own thing without government funding.

Gonski's key proposal was to allocate government funding on the sole basis of the needs of particular students, doing so in a way that was "sector blind".

An independent "national schools resourcing body" should be established to set a needs-based "school resourcing standard" for each of Australia's 9500 schools.

The standard would start with a uniform basic amount per student, to which loadings would be added to cover their students' disadvantage in the categories of low socioeconomic status, English language proficiency, school size and location, and indigeneity.

In this way, the allocation of funds would be determined from the bottom up, not from the top down in negotiations with states and sectors.

Julia Gillard required Gonski to reallocate funding in a way that ensured "no school would lose a dollar". This necessitated him proposing that total spending be increased, creating the impression he thought schools needed a lot more spent on them.

The Gillard government rejected the proposal for an independent body to oversee the reallocation and came up with its own figures for the school resourcing standard.

Labor also stuck with the top-down approach, going around the states and sectors trying to persuade them to sign up before the 2013 election.

As a result, some states and sectors did much better deals than others, which they now resent Turnbull trying to unwind.

Labor's reallocation was to be phased in over six years, with much of the cost delayed until the last two calendar years, 2018 and 2019.

Tony Abbott claimed to have accepted the plan's first four years, but reneged immediately after the election, saying the states could spend their grants however they chose.

In the 2014 budget Abbott announced that, after 2017, funding for schools would simply be indexed to consumer prices, yielding a huge saving to the budget. But he couldn't persuade the Senate to amend the act implementing Labor's funding plan.

Just before last year's election, Turnbull agreed to funding increases for 2018, 2019 and 2020 that were more generous than Abbott had wanted but less that Labor's plan.

And now, Education Minister Simon Birmingham surprised everyone by unveiling the Coalition government's own version of needs-based funding, dubbed Gonski 2.0.

It involves adjusting all schools' federal funding at different rates over 10 years so that, by 2027, all of Labor's disparities and anomalies would be removed, leaving all government schools (which are mainly funded by the states) getting 20 per cent of their school resourcing standard – up from an average of 17 per cent at present.

All private schools (whose government funding comes mainly from the feds) would be getting 80 per cent of their school resourcing standard, up from an average of 77 per cent at present.

Total federal funding of schools would grow from $17.5 billion this year to $30.6 billion in 2027, an increase of $2.2 billion over already-planned spending over the first four years, rising to an extra $18.6 billion over the 10 years.

You see from this that Gonski 2.0 would take a lot longer than Gonski 1 to reach full needs-based funding. Like Labor's six-year plan, the Coalition's 10-year plan is heavily "back-end loaded".

Of course, on Labor's calculations, a hypothetical continuation of its scheme would cost $22 billion on top of the extra the Coalition plans to spend.

Much of Labor's extra spending above the Coalition comes from its built-in higher rate of annual increase in funding, relative to the Coalition's assumed average indexation rate of 3.3 per cent a year.

Some of Labor's extra would go on higher grant increases for already overfunded private schools, and some on bigger pay rises for teachers.

Unlike Labor, the Coalition would make small cuts in grants to 24 highly overfunded private schools, while another 350-odd somewhat overfunded private schools would get smaller increases until, in 2027, every school's federal funding was aligned with its own needs-based school resourcing standard.

A big weakness in Gonski 2.0 is the way it gets federal funding sorted but ignores the eight states and territories' role in achieving needs-based funding overall. The states would merely be required to maintain the real value of their funding per student, allocated however they chose.

A weakness both schemes share is that though state-based school systems (including government systems) will receive grants based on the individual needs of each of their schools, they will be left to determine the basis on which it's actually allocated to particular schools.

My conclusion is that the opportunity Gonski 2.0 presents to have both sides politics accept and entrench needs-based federal funding, and an end to sectarian deals, should be grabbed with both hands.

There's nothing to stop Labor, or anyone else, coming along later and fixing its weaknesses.

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Fixing disadvantaged students key to fairer, better economy

We have a big problem in Australia that has been happening for so long we hardly notice it. It's that far too many of our young people leave school with an inadequate education.

According to Victoria University's Mitchell Institute, 26 per cent of students fail to finish school or a vocational equivalent.

I'm sure some of these people catch up in later life, while others lead rewarding lives without benefit of further education. But I fear most of the 26 per cent lead lives of economic insecurity and limited personal fulfilment. They are the shockingly high proportion of students our school system has failed.

The hardest question I'm asked as an economics writer is why when, until the mid-1970s, economists defined full employment as an unemployment rate of less than 2 per cent, today they say it's about 5 per cent. My explanation is that the economy has changed, but our schools haven't kept up.

The great majority of unemployed people are unskilled.

And many of these are people who left school early. They didn't understand what teachers were attempting to teach them, they hated school with a passion, and left the moment they were permitted to.

My theory is that, until about the mid-'70s, the economy generated plenty of unskilled jobs, sufficient to absorb all the children who left school without being too hot at the three Rs.

These days, there are proportionately far fewer unskilled, brawn-not-brain jobs available, but just as many under-educated children quitting school.

Our schools seem to accept their high failure rate as inevitable. This may be partly because the ever-greater socioeconomic segregation of our schools – church schools serving those from better-off families, public schools serving everyone who can't afford a church school – has concentrated the failures into government schools in outer suburbs.

Certainly, school authorities seem to have given little attention to explaining why the failure rate remains so high, and which modes of classroom operation and teaching methods have been shown to get better results.

As a nation, the inadequate education of so many of our children is an issue that just hasn't registered on our radar.

One part of the greater influence of the nation's "rich and powerful" is that we worry far more about the problems of the brightest and best than the problems of those at the bottom, struggling to keep their seat on the tram of prosperity.

Economists spend far more time worrying about whether the rich are overtaxed than why the poor are being under-educated.

Most people see this as a matter of fairness. Many profess to believe in "equality of opportunity", but if you're genuine about that it means ensuring everyone at least starts the adult race with decent education, if nothing more.

And when you remember how much better-off children inherit – not just money, but brains and socialisation – that means governments devoting more resources to helping the bottom end keep up than to helping the top end excel.

But I see all this as just as much a matter of economic efficiency. What's efficient about allowing a large minority of our young people to emerge from school without sufficient education to ensure they can attain regular employment?

If we could get the "natural" rate of unemployment down from 5 per cent and closer to 2 per cent – if we could increase by 2 or 3 percentage points the proportion of the available labour that's actually put to work – this would do far more to increase "jobs and growth" than cutting the rate of company tax.

The first step in ensuring all our children get a decent education is better early childhood learning – a vital issue I'll leave for its own column.

The next step is ensuring the money governments spend on schools is biased in favour of those students needing more help, not those schools that have managed to screw better deals out of the politicians over the years.

That's why my heart leapt in 2011 when David Gonski recommended a way of rising above our anachronistic division of government funding on a sectarian basis, sharing it purely on the basis of student need and in a way that was "sector blind".

The plan Julia Gillard delayed producing until not long before the 2013 election was a big spending, but heavily compromised version of what Gonski recommended. Labor was desperate to get the states and sectors to sign up, so some of them bargained better deals than others.

Tony Abbott wasn't genuine in his professed support for needs-based funding and abandoned it immediately after the election, proposing utterly unrealistic cuts in grants to schools.

That's why it's so encouraging to see Malcolm Turnbull and his hard-working Education Minister, Simon Birmingham, advancing their own improved but less expensive version of needs funding.

You'd expect anyone genuinely committed to a better deal for disadvantaged students to seize this rare chance for bipartisan agreement, locking in better policy for possibly decades to come.

If Labor thinks we should be spending a lot more on schools, it can promise to do so at the next election.

But for Labor and the teachers' unions to oppose Senate approval for the Birmingham plan invites us to wonder if they're putting their own interests ahead of the disadvantaged students they profess to care so much about.

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Liberals paying for Labor’s bigger government, as usual

The Liberals have always been right to portray themselves as the party of smaller government and Labor as the party of tax and spend. If you think that changed with last week's budget, you don't remember Australia's fiscal history.

But two qualifications. One, Labor often stands more for spending first and reluctantly thinking about higher taxes only when the bills start coming it.

That’s after it has carefully structured some new scheme so its true cost isn’t apparent for several years, after it’s too late to pull back.

Two, the Libs have never had any success at shrinking the size of government after Labor's latest spending spree. Their role when in office has been to keep the lid on further demands for bigger government.

But they've always reluctantly submitted to the reality of the "spending ratchet": once some new spending program has become established, there's no way the electorate will let you chop it back.

That's what last week's budget was about: not the Libs becoming big spenders, but Malcolm Turnbull's recognition that it was his responsibility to find a way to pay for Labor's national disability insurance scheme and shift to needs-based school funding, not to mention the ever-growing cost of Labor's most popular government expansion, Medicare.

The spending ratchet is seen in every developed economy. It's what's stopping Donald Trump abolishing Obamacare. What do you replace it with that's just as good?

The two main parties have played these complementary roles at least since the end of World War II.

Bob Menzies and his successors spent two decades resisting, or fending off for as long as possible, all demands for widening the government's responsibilities.

He even delayed the introduction of television until the looming Melbourne Olympics in 1956 forced his hand.

Leaving aside its ministers' utter inexperience, this does much to explain the excesses of the Whitlam government.

Labor felt it had 23 years of catching up to do, and tried to do all its modernising in three years, more than doubling government spending.

Gough had no worries about how he'd pay for it all: he wouldn't need to raise taxes because rampant inflation meant bracket creep would cover everything. Oh, no probs then.

Malcolm Fraser's government stopped the growth in spending, but did nothing to diminish it. It did, however, manage to dismantle Medibank, deeply hated by the Libs.

The Hawke-Keating government focused more on macro-economic management and micro-economic reform than bigger government, but it did restore Medibank as Medicare, and institute compulsory employee superannuation.

For once it did pay its bills, achieving big budget surpluses before the onset of the next recession.

By the time John Howard won government in 1996, he'd learnt his lesson and pledged not to touch Medicare. He hated compulsory super – which he saw as giving his union class enemies influence in the halls of capitalism – but didn't dare to dismantle it.

Howard did much to undermine our ultra-low-cost, means-tested welfare state – the main reason our tax level remains among the lowest in the developed world – by introducing middle-class welfare in the form handouts for self-proclaimed self-funded retirees, tax subsidies for private health insurance and greatly increased grants to private schools.

Peter Costello's later mania for tax cuts – from which the budget is still recovering – was explained by his still-unchallenged record as our highest taxing treasurer: 24.2 per cent of GDP in the mid noughties. And Turnbull was left to rein in Costello's unsustainably generous super tax breaks for high-income earners.

Kevin Rudd thought every problem could be fixed by spending a lot more money. For instance, he mortgaged the budget's future by increasing the base rate of the age pension, something Howard wouldn't have dreamt of doing.

It was our good fortune to have a spendthrift like Rudd in charge of the national chequebook when the global financial crisis hit and a generous cash splash was exactly the right response.

In the end, however, it was Julia Gillard who moved government responsibility and spending to a new plane with her cowardly no-losers version of needs-based school funding and the hugely expensive NDIS, not to mention higher pay for female childcare workers.

Be clear on this: most of the costly expansions of government responsibility introduced almost exclusively by Labor involved long overdue recognition that a country as rich as ours need not suffer under a third-rate public sector – private affluence but public squalor.

It's just a pity that the party so willing to bring us decent provision of public goods, so often leaves to the other, "smaller government" party the dirty work of finding ways to pay the bill.

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