HECS and the Rise of the Investment State

Australia’s student loan scheme, originally called the Higher Education Contribution Scheme (HECS), was introduced in 1989. This innovation, now known as the Higher Education Loan Programme (HELP) has since been exported around the world. It reflects a new way of thinking of education: as an investment in human capital. In doing so, it imports a key concept from the private sector into the public sector – the idea that some spending is really investment (in capital), which, rather than a cost, delivers a stream of future income.

The introduction of HECS in Australia accompanied the reintroduction of fees for university education, which was one of the more controversial decisions of the Hawke Labor Government and continues to be a source of intergenerational discontent.

Charging fees is clearly part of a broader policy shift towards markets. Yet a closer look at the policy mechanics of HECS reveal a contradictory picture with potentially far-reaching implications for how we understanding taxation, fiscal policy and even democracy.

Accounting shifts: education as an investment in human capital

Treating some spending as an investment rather than a cost is central to private sector accounting, but until recently was rare in the public sector, which used cash accounting concepts. The shift is important because investments create assets, which effectively cancel out spending in yearly budget balances. Accounting for spending on train lines and motorways as ‘investment’ is how the NSW Government can run one of the most expansionary fiscal policies in history and yet consistently deliver surpluses.

The politics of incorporating private sector accounting practices into government initially reflected the rise of free market thinking. These concepts helped reorganise public sector agencies along corporate lines (corporatisation) and enabled better cost comparisons between public and private providers (a key component of competition policy and outsourcing). The practices themselves appear largely technical, but over time they have produced contradictory results.

For example, the InternationaI Monetary Fund (IMF) now measures a government’s ‘net public worth’. The measure previously made no sense, because public assets were not considered tradable. Measuring net worth is a logical companion to treating the government as if it were a corporation, but once measured, it highlights how mass privatisation can undermine public wealth, as is now evident in post-Thatcher Britain.

Our research on HECS offers a lens to understand these changes and the policy and democratic dilemmas they potentially pose. It illustrates how the rise of the investment state can create new fiscal choices by making the future financial benefits of policies register in current budgeting processes. However, it also shows how this can create new fiscal constraints to deliver those benefits as future financial returns. We argue that these tensions come from the blurring of boundaries between taxation and debt in the HECS system and the way this hybridity is ‘seen’ by accounting systems.

HECS as a tax-loan hybrid

About 40 per cent of the cost of university education in Australia is currently covered by HECS. Unlike government grants, the cost of funding universities by issuing student loans is not recorded as spending in yearly government budgets. Private sector accounting practices instead treat HECS as a government asset that will deliver future repayments by students. The HECS debt ‘portfolio’ is now one of the major assets on the Federal government’s balance sheet, with a fair value of $37.1 billion in 2016.

Accounting reforms that treat HECS as an investment in an asset, rather than a cost, made student loans very attractive for governments aiming to expand Australia’s university sector without increasing budget deficits. Over time, the Australian government has used HECS to redefine ongoing public financing of universities as ‘private’ by issuing more and bigger student loans.

While HECS is accounted for as a loan, its design is better understood as a ‘policy hybrid’ that combines elements of a market debt and a tax.

HECS is like a debt in the sense that only those who have attended university are liable, debt levels are determined by university fees, and repayments cease once the outstanding sum is repaid. This contrasts with conventional taxation, which is not connected to the use or cost of specific government services.

Yet, HECS aligns with taxation in other important ways. Repayments are contingent on income levels – exempting lower income earners and making higher income earners pay a higher proportion of their income – and are collected by the Taxation Office (ATO). Loan conditions are determined and changed as policy decisions that affect everyone with a liability, without reference to the risk of the borrower. This means loan conditions are not ‘locked in’ via a loan contract, but subject to ongoing political contestation, like taxation. This might be considered a reduction in market certainty, or an extension of state control.

The ‘investment’ delivered by HECS in the form of a loan therefore depends on the structures and institutions of taxation. However, this hybridity is not accounted for in budgeting processes, which ‘see’ HECS through the category of a loan. Consequently, the performance of HECS as an asset on the government’s balance sheet has come under scrutiny.

Financial market accounting practices reduce the contribution of HECS assets to the net worth of the Australian government because a proportion of loans – estimated at around 19 per cent – will not be repaid. This so-called ‘doubtful debt’ is built into the tax-like properties of HECS, where income-contingency operates like a tax-free threshold. Nonetheless, the federal government has passed legislation to reduce the HECS threshold to about $45,000 in order to lift repayment rates and with it the ‘value’ of the asset.

Our subsequent research has highlighted considerable variation in the relative ‘tax-like’ and ‘loan-like’ properties of different student loan schemes around the world, including the UK and the USA. And just like Australia, the terms of student loans are often changed by new policy decisions. Because these loans confuse traditional accounting categories, we have few tools to effectively compare different loan systems.

For example, the English student loan system creates bigger loans and imposes higher interest rates than the Australian system. Yet, this market orientation means fewer students are likely to ever repay their debts, effectively creating a larger public subsidy than first appears.

Budgeting systems have been critical in shaping these differences. Accounting rules in the UK encouraged the government to sell its outstanding student debt in order to reduce measures of net public debt, whereas slightly different rules in Australia led the Commission of Audit to the opposite conclusion.

Implications for broader policy

Beyond HECS, policy makers and advocates are experimenting with approaches that reimagine social spending as investment across a range of policy domains. In NSW, Just Reinvest is trialling programs that (re)invest money in community services, funded by savings to prison costs avoided by the services. Nationally, the federal government has recently established The National Housing Finance and Investment Corporation (NHFIC) to pool and guarantee low-cost and long-term loans for social housing providers. These examples indicate new financial policy models and accounting systems that could make it easier to fund programs that provide long-term fiscal benefits and, like HECS, do so through the public budget rather than private financial products.

As business and investment categories become more common in public budgeting, it is likely we will need new fiscal and policy concepts to help us analyse the risks and opportunities of innovative ‘hybrid’ policies. ‘Capital’ accounting systems bring advantages to governments looking to create policies with long-term benefits beyond the current electoral cycle. But rather than simply transplanting private sector categories and techniques, accounting in the public sector needs to be sensitive to the unique roles and responsibilities of government.