New Cake Slicer Required

THURSDAY, DECEMBER 16, 2010

New Cake Slicer Required

That doesn't look fair somehow

When all else fails, look at the facts. Tyler has been spending so much time screaming at those free-loading students on the telly, that he temporarily forgot that vital insight.

As we blogged here, Lord Browne's recommendations on higher education funding were spot on, and we strongly support their swift implementation by the government. It simply isn't fair that taxpayers should pick up the tab for uni courses, when it's the students themselves who get the lion's share of the benefits. Why should we pay for them to schlep their way into higher income jobs?

As Browne's report shows, the average male graduate can currently expect to receive a boost to his lifetime income of around $200,000. And although the boost for female grads is less, it's still well worth having.

But the question we taxpayers need answering is how much do we get? Given that we've been paying the bulk of the costs, what have we had back?

Because although we keep hearing students and academics telling us that we'll all benefit from graduates "boosting the economy", there is a distinct lack of fact to go with such assertions. How much benefit, and how does it stack up against the costs?

So here are a few facts, taken from this paper produced for the European Commission.

The critical calculation goes by the snappy title "the public rate of return to tertiary education". No, don't switch off. All it means is we're comparing the extra income generated by these higher earning grads in future (as against the income they'd have generated without a degree), to the costs of putting them through uni (including the loss of income they'd have generated had they been out working). And we express that return as an annual percentage, just like the interest rate on your building society account.

Anyway, despite the explosion of M Mouse degrees and the general dumbing down we all know about, it turns out that this return is still quite respectable. According to the OECD, the average UK graduate currently generates a public rate of return of around 6.5% pa. In other words, by investing in his university education, society gets a return of 6.5% pa over the next 40 years*.

Now that's not bad in today's circs - much better than the 0.5% pa paid on a typical bank savings account. In fact, it's much better than Tyler assumed (hence the need for facts). So we really shouldn't knock it.

But the key question is how does that 6.5% return get divvied up? Who gets it - the individual student or society as a whole (aka the taxpayer)?

It turns out that here in the UK, the graduate does very well indeed. Although the overall public return is only 6.5%, the average graduate's return (according to the OECD) is 14.4% pa - well over twice as much.

How? How can the grad get so much? Simple - he doesn't have to pay anything like the full cost of his university education.

But if the grad gets much more than 6.5%, that means the rest of us must be getting less - we know the size of the cake, and if he gets a bigger slice, we get a smaller one.

So is that fair? Is that a fair division of the spoils?

I submit to you that it isn't. And when we look at other countries, we can see that the division is much less fair here than it is elsewhere. Here are the OECD figures for a range of European countries, showing how the gap between the private return (the slice going to students) and the social return (the fixed cake) is higher here than anywhere else, except the Czech Republic, Portugal, and Switzerland.

Looked at in that light, it seems pretty clear some rebalancing is required. We need to reallocate some of the return away from the students themselves back to society in general. And higher fees are an excellent way of achieving that.

There's one other interesting factual snippet in this EC paper, on the question of whacking students from poor backgrounds.

We've been hearing a lot about how the higher debts driven by higher fees will put off poor students from going to uni. And how that isn't fair.

But it turns out that from a financial standpoint - even when they can access higher edcuation - students from poorer backgrounds don't get nearly as much out of it as richer students. It seems that the return for richer UK students is getting on for three times that for poor students.

Why?

Here's the long version:

"Overall, the expansion of tertiary education in OECD appears to have had little impact on the relative prospects of young people from less advantaged backgrounds. This is hardly a surprising finding. Parental and school influences are extremely important determinants of participation at post-compulsory level. In most countries tertiary education requires prior qualifications -- generally at upper-secondary level – so that attainment in the compulsory phase of education, as much as anything which occurs subsequently, is a key to tertiary participation. Therefore, the expansion of capacity at the tertiary level will not, in itself, have much impact on these factors. The challenge to public policy of delivering equality of opportunity in tertiary education is sizeable, and falls not only on the system for tertiary education itself, but also on support for children and their families, reaching back to pre-schooling and into compulsory and upper-secondary schooling."

The short version? The damage is done long before university level. If we really want to help kids at the bottom, we need a radical improvement in our state schools.

Sounds familiar somehow.

*Footnote. Yes you're right - the OECD numbers are based on what yesterday's graduates of different ages are earning today. And actually that may not be a good guide to what today's grads will earn over their lifetimes tomorrow. So with dumbed down degrees etc, the OECD's numbers may very well overstate the prospective return to uni education today.

Cost Of Bank Bail-Outs

A very rocky road, and still a mountain to climb

This morning's National Audit Office report on the cost of bank bail-outs is being headlined as saying taxpayers will likely escape without loss. But it actually says nothing of the kind.

True, the NAO tells us taxpayer exposure to the special guarantee and indeminity schemes (the Asset Protection Scheme, the Special Liquidity Scheme, and the Credit Guarantee Scheme) has halved to around £500bn. But:

"The Treasury retains the unquantifiable ultimate risk of supporting banks should they threaten the stability of the overall financial system. The outstanding £512 billion is only on the explicit support already provided. Further intensification of financial instability may require additional intervention."

That massive implicit guarantee is one we've blogged many times. And let's be under no illusions - at a time when there are still huge uncertainties surrounding the creditworthimess of banks right across Europe, the market reckons our two big nationalised banks remain pretty risky.

As the NAO highlights, the market price for insuring against default by RBS or Lloyds has remained right at the top of the range for similarly sized European banks (NB a 5 year Credit Default Swap cost of 200 basis points paroughly means the market reckons there's at least a 2% chance of default within 1 year, implying at least a 1-in-10 chance of default within 5 years).

And with that level of risk, unsurprisingly our banks have underperformed other banks in the equity market:

In other words, we're still propping up two relatively high risk megabanks that the market doesn't much like the look of.

And there's another point the NAO highlights. In order to inject funds into the banks, the government has had to borrow more. And that costs. According to the NAO:

"...the Government is paying some £5 billion a year (£10 billion so far) in interest on the Government borrowing raised to finance the purchase of shares and loans to banks. This ongoing cost is material in terms of the overall public finances and deficit. This £5 billion a year was not included in the Treasury’s previous estimates of the loss to the taxpayer, because the Treasury does not consider them to be direct costs. The estimated £5 billion a year interest on this debt is 11 per cent of the total £44 billion forecast to be paid in interest on public sector debt in 2010-11."

Whatever it says in the headline, the bottom line is that we ain't out of jail yet. Not by a long chalk.