Confusing figures on cost of universal allowances

Media reports on the costs of universal student allowances are somewhat confused. The initial story in The Press stated:

The paper shows that removing income tests on the allowance and providing it to all fulltime students would cost a total of $2.09 billion over four years.

The net extra cost of such a plan is $728 million after the existing costs of the scheme are removed, along with a forecast plunge in borrowing under the student loans scheme that might accompany such a plan.

Now this story is largely correct, but the confusion starts here because of two things. Firstly it wasn’t made clear the $728 net cost was over four years also, and the reduction in cost from $2.09 to $0.73 billion is attributed to both the existing costs of “the scheme” and a forecast plunge in borrowing.

I’ve obtained a copy of the Ministry paper, and the $2.09 billion “total net cost” actually already includes any savings from reduced student loans. The difference between the $728 million and the $2,094 million is merely the difference between the status quo and the “total net cost” of universal allowances. In 2011/12 it would be an extra $226 million of annual expenditure.

So what impact would universal allowances have on the student loans scheme? In fact fairly modest. Over four years there would be a reduction in operating expenditure of $107 million and a reduction in capital expenditure of $260 million. In 2012/12 the student loans scheme would cost the taxpayer $33 million less than if one had universal allowances.

So the original story while largely correct, was imprecise and had one aspect wrong. And then see how the story changed;

NZPA picked up the story, and as reported in the Herald says:

The Press said the $728m net extra cost of such a plan was based on removing existing costs of the scheme and factoring in an expected reduction in student loans.

NZPA have left off the all important fact that this is a cost over four years.

Then we turn to today’s Press editorial:

Figures from the ministry suggest that the total cost would be $2.09 billion over four years, although that could go down to a net cost of $728 million if student borrowing fell, as the ministry expects it might.

No no no. The $2.09 billion already takes into account a decline in student borrowing. The fall to $728 million is merely deducting the cost of current student allowances.

The Press are correct with their warning:

Voters will recall the Government’s assurance that interest-free loans would not greatly increase student borrowing. A survey of student borrowing shows, however, that since 2004 the average debt has risen 54% to $28,838. While not all of that is attributable to the interest-free nature of the loans, it does suggest that a considerable number of students (or their parents) are doing exactly what was predicted leaving their own money in the bank to earn interest and taking out a loan interest-free, at the taxpayers’ expense, to meet their educational costs.

And something the Ministry paper does not do is project any increase in student numbers, if allowances became universal. I suspect there would be an increase in numbers studying if this did happen.

Anyway back to what are the actual costs of universal allowances. As far as I can tell from the Ministry paper, the costs are:

1. Gross costs of universal student allowances: $2,221 million/4 years or $657 million in 2011/12
2. Reduction in operating cost of student loan scheme: $107 million/4 years or $33 million in 2011/12
3. Net cost of universal student allowances: $2,094 million/4 years or $624 million in 2011/12
4. Current cost of student allowances: $1,366 million/4 years or $399 million in 2011/12
5. Net additional cost of policy: $728 million/4 years or $226 million in 2011/12

Note I don’t guarantee these 100% as the Ministry paper itself is not totally explicit with its calculations. But hopefully this gives a far better idea of the costs than the various media reports.