Following on from my article yesterday questioning the merits of the Government’s proposal to sell-off Australia’s $23 billion of outstanding HECS debt to the private sector, Matt Cowgill has published a neat post fleshing-out some of the concerns in greater detail:
…The proposal is kind of bananas.
Think about it from the perspective of a potential investor who might consider buying a security that entitled them to a stream of future HECS repayments from former students. As they’re currently structured, HECS debts have a 0% real interest rate (they’re just indexed by the CPI), there is no fixed timetable for repayments, and unpaid debts can’t be recouped from a debtor’s estate when he or she passes away.
It wouldn’t make sense to buy such an asset at its full value, when there are other safe assets with guaranteed repayment that pay real interest. To induce people to buy his HECS securities, then, Mr Hockey would have to either:
- Sell them at way below their face value; or
- Change the terms of the debt by charging real interest and/or allowing the debt to be recovered from the estates of deceased debtors.
In option 1, Mr Hockey would be exchanging an asset from the Government’s balance sheet (outstanding HECS debts are an asset from the Government’s perspective) for a sum of money upfront that would be worth way less than that asset. This is the opposite of responsible financial management… This is the fiscal equivalent of hocking your possessions at Cash Converters…
In option 2, the Government could make HECS more attractive to potential investors by changing the terms of HECS debts. It could lower the repayment thresholds, collect HECS from Australians working overseas, and/or recoup HECS liabilities from the estates of deceased debtors. These options would all reduce the proportion of HECS debt that is never repaid. It could also start charging real interest on HECS debts. Each of these measures would increase the flow of income from HECS debtors to the owner of the asset.
There are a few problems with this. First, any change like this that would make the ownership of HECS debt more attractive to private investors would also make it more attractive to retain on the government’s books…
The second big problem with changing the terms of the HECS debt is that it could discourage people from going to uni, particularly prospective students from relatively poor backgrounds. At the moment, HECS is a pretty good deal. Your debt doesn’t rise in real terms, you don’t start paying it back until you earn somewhere around the median full-time wage, and the repayment levels are not too onerous. If you change that deal, you risk putting people off from going to uni…
It is difficult to imagine conditions under which this policy makes sense.
Matt Cowgill provides other reasons why privatising HECS would likely be poor policy, which you can read in-full here.
Interestingly, Stephen Koukoulas posted a tweet yesterday suggesting investors would pay between $6 billion to $8 billion for the HECS pool, which is roughly one-quarter to one-third the face value of the outstanding debt:
Let’s hope the Abbott Government doesn’t proceed with this fiscal vandalism.