Govt must re-look free higher education, civil servants’ wage increases – OECD

South Africa’s government should reconsider its free higher education model and implement a blended loan-grant system to ease the strain on fiscal resources, the Organisation for Economic Cooperation and Development (OECD) has recommended in its 2020 economic survey.

The recommendation is one of several measures provided for the government to stabilise public finances, following the impact of the Covid-19 pandemic on its fiscal deficits and debt weighed down by persistent low growth, the public sector wage bill and bailouts to state-owned entities.

The fully subsidised bursaries for students coming from families with a total household income of R350 000 first came into operation in 2018 and have now given over 90% of students access to institutions of higher learning.
Returns

Initially, free higher education, administered through the National Student Financial Aid Scheme (Nsfas), was open to first-year students and existing undergraduate Nsfas loan recipients. The scheme’s coverage gradually expanded and in 2020 this meant that qualifying students from first- to third year were covered at a cost of R35 billion.

The OECD said that among its 37 member countries, having a tertiary education often results in higher earnings. The assumption is that by investing in higher education this will lead to higher social returns from income taxes and social contributions from tertiary-educated individuals, who will also need fewer social security benefits.

But in South Africa, the benefit will not be realised soon from a budget perspective, said the OECD.

“The impact on tight fiscal resources should be considered and alternative financing mechanism[s] could be mobilised, to at least partially cover the cost,” it said.
“Moreover, under the current tax system and depending on the assumed discount rate, the net present value of government expenditure for university undergraduate education remains on average negative – even when considering favourable assumptions of continuous employment.”
At R38.2 billion in 2022, the state’s spending on Nsfas will be three times as much as that spent in 2017. Government’s total spending on higher education, including university transfers and other spending, has grown from 1.3% of GDP in 2017 to 2.6% in 2020.

Income-contingent loans

The OECD has recommended that government tweak the bursary grant scheme by determining support for eligible students on a sliding scale based on household income and introduce the participation of banks through income-contingent loans.

This means students from poorer families (in the R0-R350 000 qualifying spectrum) will get fully funded government support, while those at the upper end of the spectrum would receive less government support.

The balance of what is not covered through a Nsfas grant will be supplemented by a government-guaranteed bank loan “to ensure that students from higher-income families are not constrained in their educational choices due to access to financial resources”.

“Efficient administration of the scheme, including the collection of repayments, is crucial,” said the OECD.

Heher Commission

This model of funding free higher education is similar to what the Fees Commission headed by retired Judge Jonathan Heher proposed.

After a year of public hearings and work probing the feasibility of free higher education, the commission released its report which found that fee-free higher education for all was not possible, especially for university students, without a detrimental cost to government spending on other social priorities.

The report recommended that education at technical and vocational education and training (TVET) institutions, which have been improved, should be free. However, university students would need to get income-contingent loans, underwritten by the government, from banks that they would begin paying back when their income after graduation reaches a certain threshold.

These recommendations were ignored by former President Jacob Zuma, who unexpectedly announced free higher education for working-class and poor students on the day the ANC’s elective conference was set to begin in December 2017.

Fiscal sustainability

In addition to reevaluating the free education model, the OECD said the government should consider indexing public sector wages to below inflation for the next three years, as a way of “managing spending pressures”.

Compensation of government employees in OECD countries in 2020. Source: OECD Economic Survey: South Africa 2020

Government spending on public sector wages accounts for 12% of GDP – higher than the OECD average and that of individual partner countries.

It notes that in the last 10 years the number of public sector employees only rose by 100 000, and with the introduction of a recruitment freeze in 2011, the number of employees has actually been “trending down”.

“The remuneration policy explains the increase of the wage bill,” it says.

In addition to above-inflation increases, promotion policies and occupation-specific salary dispensations – meant to improve government’s ability to attract and retain skilled employees through increased remuneration – have also contributed to driving the wage bill up.

“As inflation has receded, and given the wage gains of recent years, the real cost to civil servants would be limited, as they would still benefit from annual progression in the pay scale,” said the OECD.

“Such a measure could create fiscal space for government investment in infrastructure and education.”

• This article has been re-published with permission from Moneyweb

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