Why Albanese’s HECS gift is a reverse-Robin Hood

Governments are the Robin Hoods of the modern world, taking money from the better off so as to hand it to those who need it. But the Merry Men would have been left scratching their heads when Anthony Albanese announced his first big pre-election pitch at the weekend.

That’s because, although plenty of dollars were thrown around, they’re for a reverse-Robin Hood. Albanese announced a big tax cut for higher income earners … but only for those higher earners who went to university or TAFE. Yep, the prime minister’s big reveal was that less well-off Australians will be tapped to pay for a bigger subsidy to those who are better off.

He didn’t quite put it that way. Instead, Albanese declared a $16 billion cut to student debt would be “the first thing we do in our second term”, arguing it would make Australia “fairer”.

Them’s the bucks ... non-graduate taxpayers will be among the masses giving this $16 billion tax break to higher-paid graduates. Credit: Andrew Meares

Except … people with student debts are comfortably better off than most Australians. If you went to uni, your lifetime income is about a third higher than those who didn’t. Even after the tax man gets his cut, that’s about three-quarters of a million dollars more for those who went to uni versus those who didn’t. Them’s big bucks.

Those dollars also say that student debts – which average $27,600 – are less than 4 per cent of the benefits to their personal pockets that graduates get from their studies. That’s a pretty good deal even before we forgive 20 per cent of those debts.

And the oldest rule in economics is a simple one: somebody pays. Like it or not, the government can’t magically make 3 million Australians better off without impacting the other 24 million Australians.

Who will pay? Well, if we’re going to give a $16 billion tax break to people on higher incomes who went to uni, then we have to get that pound of flesh from the people who didn’t go to uni – other taxes will have to go up, or our spending will have to be cut. That’s why handing $16 billion to graduates is a fairness fail.

Worse still, that $16 billion does nothing for the nation’s future. It will make Australia less fair and won’t move the dial on national prosperity: it doesn’t deliver incentives that would make anyone more likely to study. That’s because it only applies to student debt that’s already been racked up.

Nor does it encourage anyone into work. The changed incentives it does deliver are bad. The success of lobbying efforts to cut student debt hands a mouth-watering 20 per cent after-tax return to those who haven’t already paid their debts. That means those graduates – or their parents – who have already paid their student debt must be left feeling like mugs. They’ve done their dough.

And anyone thinking of paying off student debt early would be dumb to do so, as this change makes it more likely that future governments will eventually buckle with further rounds of relief.

There are many things Australia can and should spend $16 billion on, but forgiving the debts of higher-income earners doesn’t make this nation fairer or more prosperous.

Luckily, the government also made some much better announcements alongside its big dollar pledge on debt forgiveness. Most notably, uni and TAFE graduates will now be able to earn more before they have to start repaying their student loans, and the pace at which they’ll have to pay it back has also been sensibly trimmed.

That’s good policy – and it’s also smart politics.

Even better, the government is absolutely right that none of its newly announced assistance will hurt inflation prospects. These new policies don’t affect the “will they/won’t they” calculations as to whether the Reserve Bank delivers an interest rate cut before the federal election due by May.

That’s because these changes won’t appear until the middle of 2025, and even then the dollars will arrive as a steady stream rather than a big lump. (Yet the flipside is that, although this stuff won’t trouble the RBA much, nor does it provide much cost-of-living relief to uni graduates. The dollars arrive too slowly and steadily to help around many kitchen tables.)

And one last thought – an admittedly nerdy one. Another reason why the government has been happy to forgive a bunch of student loans is because the cost of that doesn’t show up as a worse budget deficit. That’s not because Australia’s federal finances aren’t hurt by this, it’s simply because our arcane rules allow student loans to sit “off-budget”. And even that’d be fine if our system of student loans paid for itself, but these new changes mean it won’t.

It means budget deficits are actually worse than the official figures say. As is increasingly true in the modern world, we’re hiding some true costs from ourselves.

Chris Richardson is an independent economist.