Can we really afford to not invest more in education?

28 June 2016


The Australian newspaper has been running a none too sophisticated campaign against the boost in education spending of $37 billion over the next decade promised by Labor. It’s a mish mash of half-truths and contortions of logic, as is often the case when The Australian goes politically feral.



Labor has drawn on an OECD report, Universal Basic Skills, to supports its argument that increased spending on education not only contributes to equity and social inclusion but is an investment in future improvements in productivity (and, indeed, Malcolm Turnbull’s Ideas Boom).  It’s a proposition with which most economists agree.

It’s actually a complicated report, which can be hard to follow, so I don’t fully follow the reasoning entirely myself but I bet I’m doing better than The Australian. But the basic proposition is quite clear:

Setting aside any social and cultural benefits, the attainment of universal basic skills in a country by 2030 would have a substantial positive effect on medium and long run economic growth driven by productivity gains.

The definition of “basic skills” used in this report is “the acquisition of at least level 1 skills (420 points on the OECD Programme for International Student Assessment (PISA). This level of skills to “modern functional literacy” (the report has a booming definition of functional literacy (see below).

The report says that the projected economic gains of attaining universal basic skills “would be stunning for all countries – even high income OECD countries”.

In general, by 2095, GDP would be 30% higher than that expected with today’s skills level, representing the result of an annual growth rate that, in the end is 0.5 percentage points higher.

Is that really a lot?

Well, the current GDP of the US is around $US16 trillion: it would see a present value of gains of over $62 trillion.

The current GDP of Australia is around $1.4 trillion roughly $US1.1 trillion: we would see a present value of gains of nearly $US4 trillion – about 4 times current GDP.

Sounds like a lot to me, even over the expected lifetime involved over someone born today (which is the timeline adopted).

However, The Australian has seized with unrestrained glee the protracted timeline, with its news report stating:

Bill Shorten stands accused of misleading voters over the boost to growth from his $37.4 billion school funding plan by claiming an economic lift “straight away” from the spending despite economic ¬research that shows the gains would take decades.
n a blow to the Opposition Leader’s economic case, the author of the global study used to justify the Labor spending told The Australian there would be no “immediate” boost to growth — and that more money was not the key factor in producing the economic benefit.

The editorial really got stuck in – and it’s necessary to quote at length:

Parents frustrated by their children’s (and in some cases their children’s teachers’) inability to spell will be underwhelmed by Bill Shorten’s faux promise that Labor’s promised $37.3 billion spending splurge on schools would produce an economic dividend — in 2095. Such a ludicrous, extravagant plan not only defies fiscal reason, it fails to address the pressing shortcomings of our education system.

… the Australian Council for Educational Research is the latest organisation to point out why spending more is not the answer to better educational outcomes. The challenge, identified by ACER chief executive Geoff Masters in a new report, Five Challenges in Australian School Education, is better application of existing government funding based on evidence-based strategies. Three-quarters of Australia’s fastest growing industries need graduates with strong science, technology, engineering and maths skills. Secondary students’ participation in physics and advanced maths, however, has declined steadily for 20 years. Fewer than 10% of Year 12 students study advanced maths. Fewer than 15% take physics.

Ok, it was silly of Labor to claim that “dividends” from its proposed unprecedented “investment” in education would be immediate. Of course they won’t, as Labor has now conceded.

But to the extent that benefits do flow, they will flow sooner, as well as later, and potentially with a far greater economic pay-off than other initiatives announced in this campaign.

For example, the pay-off from the Coalition’s proposed cut in business tax over ten years from 30% to 25% over ten years, at a cost of $48.2 billion, amounts to “eight tenths of bugger all”: an improvement in economic output – or GDP – of just 0.1% per year and that’s after year 10, 2015-26.

As set out above, the OECD projects that getting to “universal basic skills” has a payoff five times than that over the longer term.

And in the medium term, The Australian itself reports that Grattan Institute economist Peter Goss says:

Thirty years from now, the benefits of universal skills coming out of schools would be more than twice the value that Treasury estimates out of a company tax cut… Economic gains from education take time to flow through. They start to flow when students leave school with better skills. And those gains then build over time.

And as to the money question, Geoff Masters did not say  “increased spending on education is not the answer to lifting standards”. He said something that ought to be self-evident:

Adequate school funding is essential. But money alone is not the answer; we have increased spending on schools and still seen standards decline. We urgently require a national action plan to target resources on proven, interconnected strategies for arresting the drift in our schools (emphasis added).

In the report Five challenges in Australian school education, Masters says one of the key challenges :

….is to reduce current disparities in the schooling experiences of students in Australia’s most and least advantaged schools. The general challenge is to ensure that all students receive a high-quality education regardless of where they happen to live or the school that they happen to attend.

Sounds straight out of the Gonski playbook to me and addressing all five challenges would require significant additional spending on education (or redistributing current spending – see below). Masters goes on to say:

It might be concluded from this observation that better funding is not the answer to better educational outcomes. However, a number of other countries have succeeded in raising the performances of their schools at the same time as performances in Australia have declined. This suggests that whether or not increased funding makes a difference depends on how it is applied. Our national challenge is to maximise the impact of government expenditure by targeting it on evidence-based strategies to improve performances in Australian schools (emphasis added).

The Australian opines that what is required is better application of existing government funding based on evidence-based strategies (although it does approve of Labor’s proposal to spend $400 million to improve the teaching of STEM subjects).

Well, if that’s the case, the starting point has got to be redistributing the substantial amounts of government funding going to Australia’s wealthiest schools (“class warfare” as The Australian would depict that).

The Age recently reported, for example, that some of Victoria’s wealthiest private schools have reaped huge government funding increases, while disadvantaged public schools have been hit with cuts. The graph illustrates the bounty reaped by such schools in recent years.

Increase in Government funding for selected elite schools 2009-2013 (%)

Funding graph

Similar story in New South Wales, according to The Sydney Morning Herald:

Twenty of Sydney’s wealthiest private schools received $111 million in taxpayer funding last year, new data has revealed, allowing the institutions to subsidise plans for tennis courts, flyover theatre towers, and Olympic pools with underwater cameras.

The so-called “renovations” at St Catherine’s School alone would funding the building of 3 or 4 good sizedand well equipped government schools (albeit, without lap pools and world class auditoriums). St Catherine’s had a net income in 2014 of about $30 million, including $6 million in Commonwealth and State funding.
St Catherines

The question should not be whether we can afford to invest more in education but whether we can afford to. As observed in the OECD’s report, “when the potential gains are compared to total spending on education…arguments against school improvement based on limited funds are indeed shortsighted.”

Literacy defined




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