Defining 'Free' in Free Education

Recent student protests over tuition fees, university staff and curricula, university autonomy as well as outsourcing have highlighted numerous issues facing South Africa. The agreement not to increase fees in 2016 has left the country having a short-term education-financing gap. The increasing demands for free university education leave it having a longer-term, and much bigger, financing issue.

Can South Africa meet the funding deficiency in 2016? Yes.

Can it pay for free education for all? No. Someone will have to pay.

The effect of no fee increases

In the short term, the outcome of the 0% increase is unlikely to boost eyebrows, if it is indeed the once off. Cost estimates range between R2.6 billion and R4.2 billion, depending on the methodology used.

One objective estimation of the cost is based on the dumbbells from the consumer price catalog, where the cost of education makes up about 2.95% of consumer investing (basic and secondary education account for 1.72% and tertiary education accounts for 1.23%). The GDP forecast is at R4.35 billion, which corresponds to R2.7 billion in consumer spending. Using the 1.23% weight to customer spending gives an estimate of the cost of tertiary education.

Between 2009 and 2015, tertiary institutional charges escalated at around 4% to 5% over the rate of inflation. Likewise, student numbers increased more than that period, suggesting the dumbbells above need to adjust upwards. For that reason, we assume a 1.5% consumer weighting.

Thus, the cost of university fees (excluding bursaries) would be close to R40 billion per annum. Given that a 10% increase sparked the student protests, which implies the need for R4 billion. If that is the only cost, the budgetary impact will be small.

If funded by government, without using the contingency reserve (just R2.5 billion has been allocated for the 2016 contingency reserve), the actual knock-on effect on the budget deficit would be no more than 0.1% of GDP (R4 billion from R4.35 trillion GDP, yields 0.092% of GDP).

Is free university education affordable?

Using the same values above, free university education would require a minimal injection of R40 billion in the public purse. Such an shot implies that the deficit might increase by nearly 1% of GDP, if not funded from alternative arrangements.

The amount could be raised through borrowing and monetising that deficit. However, monetising leads to inflation, which is bad for the poor. Thus, tax revenues, either current or future, will have to rise.

In addition, fees aren’t the sole cost to university attendance. To go to a residential institution, students require “study-friendly” accommodation near the institution as well as adequate nutrition. The overall cost towards the fiscus could be as high as R100 billion per annum. Because reduced tuition disproportionately advantages the wealthy, it is unlikely that free education will happen for those.

For this analysis, we assume a cost of R60 billion, which includes the R40 billion and a back-of-the-envelope estimate of the additional amount necessary for state-owned student lender, the National Student Financial Aid Scheme (NSFAS). For 2014-2015, NSFAS obtained R8.8 billion, which was in between one-half and one-third what was required. All of us round the amount to R20 billion.

Raising an extra R60 billion in a depressed economy through taxation is a daunting task. The Medium-Term Budget Coverage Statements suggest that South African Revenue Services still has range to raise further revenues from clamping down on tax avoidance.

In addition, the government will look to secure down on the use of transfer prices by multinational companies as a means of avoiding tax. Nevertheless, these improvements in selection will not cover the additional costs.

Other options include an increase in value-added-tax (Tax), personal or corporate income tax, or the siphoning of funds through some other activity. The Tax rate now is 14%.

Based on simulations we’ve done, VAT would have to go up by around 0.6% to 14.6% to raise revenue by R60 billion. For personal income tax, the actual feasible increase rate might lie between 1%-5%, depending on the degree of bracket creep and distribute assumed. On the other hand, the public field wage bill is in the selection of R450bn, and increases of 7% had been recently agreed.

How about a higher education tax?

The government could also consider the introduction of new taxes, like a carbon tax, wealth tax or higher education tax.

A higher education tax, as in the UK, has appealing elements. Its imposition is actually on those who have earned a higher education degree, can scale to earnings, and a established number of years.

The tax could also apply retroactively. According to the 2011 census, there were 3.6 million individuals outdated 20 and older holding a higher education qualification. If your higher education tax were put on all 3.6 million, the average higher education tax would be regarding R16,667 per degree recipient per year.

The actual average would be subject to whether or not every degree holder pays, payments are limited to some certain number of years post conclusion and whether one elements in the type and level of degree. The average would additionally depend on how it is scaled to income, the total number of college students in the system and the number of students that complete and discover jobs.

For the most part, move on unemployment rates are much lower compared to the rest of the population. However, emigrants might disproportionately benefit from such a tax, potentially exacerbating brain drain, and the taxes could create disincentives to the immigration law of skilled labour.

Despite possibly exacerbating brain drain, a higher education tax is a practical solution. It allows for both “private” returns in order to education and “social” returns to education. For example, social workers are paid less, and, consequently, could be taxed at a reduce rate, while accountants generate more, and could be taxed at a higher rate.

Furthermore, it embodies the concept that education is an investment in our future.

However, many potential pitfalls to “additional taxes” remain. Without a doubt, the combination of the needed tax increases and the pure magnitude would substantially deteriorate disposable income. It would additionally lead to significantly weaker development.

How South Africa could fund steeper higher education costs is republished along with permission from The Conversation