Funding freeze a $12b own goal

Upskilling our workforce can be a fiscal balancing act. When a student engages in university education the Government contributes to the short term cost through the Commonwealth Grant Scheme, while the increased labour productivity of a graduate provides long run economic dividends. The changes to University funding arrangements in the 2017-18 Budget and MYEFO will reduce the cost of funding student places and the long run dividend - but by how much?

To answer this question we were commissioned by Universities Australia to analyse the impact of funding arrangement on future graduate numbers and the impact those graduates have on the economy and on tax receipts.

The relationship between funded places and student numbers is not one-to-one, and the number of places offered by Universities is a business decision for each institution. To account for this uncertainty we analysed both low and high pass through scenarios, combined with data on graduation rates and outcomes from the 2016 Census.

Using our in-house CGE modelling capabilities, we find that the $2.1 billion cut in University funding leads to a real, net present value reduction in tax revenues of between $2.2 billion and $3.9 billion, combined with foregone GDP of between $6.9 billion and $12.3 billion. Finally, the $2.1 billion budget savings are expressed in undiscounted, nominal terms - in real discounted terms the actual saving is closer to $1.6 billion.

This analysis highlights the care that must be taken when balancing a short term fiscal savings against a long run productivity hit.

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