Free tutition-Policy Trick or Economic Treat?
- Leyton Rahman
- May 16, 2017
- 5 min read
Labour truly can deliver on their policy of abolishing tuition fees and its the most sensible policy yet.
Others have explained the mechanism and the funding issues. There is a more important socio-economic issue though.
Let me explain and I will break it down into some themes
Economic
Tuition fees apparently addresses a short term funding issue. Education is very expensive business. For government to fund it directly from general taxation, it would add several percentage points on income tax, and yet this is only about 30% of the cost of universities. The rest comes from overseas students (20%) and research grants etc (50%).
But it provides much direct economic benefit.
For example, it contributes much more to GDP (2.8%) than say agriculture (0.6%).
Student spending also contributes to economy by some 5%, but you could argue some of that expenditure would happen anyway.
International students contribute far more than they consume (£540 million compared to £2.8 billion in London alone)
Increases earning potential and employability (reduces unemployment)
Research and collaboration adds another 0.3% to GDP
So what has tuition fees got to do with all that you ask?
Well they are not really fees. It is a ruse to make a graduate tax look like a loan. It is a very very inefficient way of collecting taxes, high administrative cost, people simply dont pay, or make false claims, it encourages the brightest to leave for other countries to avoid paying the extra tax. You would make a very large saving if you simply added it onto income tax. But that would be a no-no. We are not the party who increased INCOME TAX!!
By calling it a loan, it is also kept off the books and reduces the apparent PSBR and so becomes a problem of the much longer term future. Politicians only think in five years periods and so this is great for politicians.
So onto the most important aspect of this, and please bear with me.
There is this thing called Labour (or workforce) Productivity. Simply defined, it is the value of goods or services produced by a person in an hour. But it is really complex figure, and needs to take into account inflation, currency strength etc, becasue value is not always directly comparable.
This is really important for any country because we only have limited time and the more you can produce within that, the more your country steams ahead. Of course you can work longer hours, but funnily enough that doesnt always result in better output.
So I’ll give you examples based on UK production compared to other countries.
So in 2015, UK price productivity (per hour) was:
above that of Japan by 16 percentage points
equal to that of Canada
lower than that of Italy by 9 percentage points
lower than that of France by 27 percentage points
lower than that of the USA by 30 percentage points
lower than that of Germany by 35 percentage points
lower than that of the rest of the G7 by 18 percentage points
[USA work much longer hours but Germany easily beat them, even with very good social public policies; e.g. vacation, maternity etc.]
Per worker, the UK GDP in 2015 was:
above that of Japan by 14 percentage points
below that of Canada by 2 percentage points
below that of Germany by 11 percentage points
below that of Italy by 12 percentage points
below that of France by 12 percentage points
below that of the USA by 39 percentage points
below that of the rest of the G7 by 19 percentage points
So Essentially UK has the worst record of any G7 country (INCLUDING ITALY) except Japan.
Now bear in mind this is 2015 data and what happens/ happened after Brexit has yet to be determined in detail. My guess is that there is going to be a sharp drop.
So how do you improve this?
I’m no expert here and there will be much dissenting views on this. Also I have some lingering concerns as to whether the data is comparing like with like. For example, some countries sacrifice safety and environmental issues to increase productivity. In the long run this is foolhardy as China found out with their smog in Beijing. Still, they got their growth.
But essentially there are three main ways this can be achieved:
invest in new equipment/ machinery/ technology
improve your processes (this is also linked to above point) AND
improve the skills of your workforce via training/ education etc.
There will be many others like improving morale etc. but they are much too hard to implement nationally and also expensive so provides less bang for your bucks.
So this is where tuition fees come in.
Charging people to study and taxing them works contrary to the aim of improving productivity.
The whole country benefits from increased productivity, so why shouldn’t everybody pay to get this benefit. After all, we pay very large subsidies to the agriculture industry, which contributes but a fraction of what Universities do (to GDP), so the benefit-cost is much lower.
If you graduate and earn more, you pay much more tax if you pay the same tax rate as everyone else. Yet you are expected to pay a higher rate of tax? This seems like double jeopardy to me. You pay more taxes AND a higher tax! Wow!
Social
I went on too long on the economic point so I’ll try and make this brief.
People like earning more
People like knowing more.
When Thatcher first introduces fees for international students and then for home students, a lot of people, particularly from abroad, were put off studying here. For example, Mahatir Mohammad from Malaysia started a “look east” campaign. Many Malaysia students used to come to UK to study, went instead to Japan and Australia. Why is this bad?
Well I can talk about the construction industry, but applies to any other industry as well.
People who graduate from UK universities generally become Anglophiles, not only that, they only know UK standards as far as construction is concerned (for example USA uses a cylinder test for concrete compared to cube test in UK. They are just as valid as each other but are not directly comparable.) So these graduates understand and are comfortable with using UK specifications.
Contrary to popular belief, most of these students go back home (who wants to live in a cold dreary climate anyway?) and by definition are the brightest and best from their respective countries. So these people end up in influential positions.
What then happens is these people specify UK standards.
So BANG UK industry has a huge advantage, like you wouldn't believe.
US, Japanese, Korean companies have to have separate teams to “translate” the standards if they want to compete for these multi-billion dollar projects. This can be very expensive and since there are usually five or more competitors, the extra cost is a big factor. You dont want to employ excellent multilingual staff at very high cost on speculative bids, and you dont want to take a big risk with your pricing as one project can bankrupt you.
So before Thatcher and early on during her PM ship, the biggest and best consultants in the world were British, as were contractors. They did the biggest and best projects everywhere.
A few years after the introduction of international fees, what happened? US and Korean companies became the ones who kept winning work, so much so that these fantastic British firms are mainly owned by foreign companies.
Same thing happened in many other industries. We used to ALWAYS specify British Steel, now its all owned by Thai companies.
Politicians need to be educated sometimes and need to stay away from jingoism and short term thinking. The move to look towards the future by providing for our children will not only win Labour young supporters, but it will dramatically boost our nation's status in the long run.
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