Trimming costs by degrees

A tweak here and a tweak there. The Government employs this strategy to rein in costs as it endeavours to tackle its swelling deficit.

Prime Minister John Key, the man who tries to be almost all things to most people, has promised not to raise the superannuation age, he and his party have left family support - so-called middle-class welfare - largely in place and student loans have remained interest free.

The actions are cautious and around the margins for those desperate to see decisiveness, while those on the left see a wedge being driven further into the substance of important policies.

So far, the Government has managed to keep the bulk of middle New Zealand, the beneficiaries of these programmes, on side. And it can point to savings that, in their totality, add up.

But how soon New Zealand can balance its budget and how it can sustain its present largesse are other questions. New Zealand is living well beyond its means and the $300 million borrowed each week is mounting fast.

One of the spending monsters that grows each year is the student loans scheme. The total owed is now more than $11 billion and every dollar lent costs taxpayers 45c.

Clearly, more has to be done to limit costs, whatever the cries of student representatives and opposition parties.

The present scheme is unaffordable and will become an increasing and unsustainable burden.

Realistically, the days of charging commercial interest rates are gone. Borrowers in the past found their debts compounding, especially for those not working and therefore not repaying. Many were young people endeavouring to start careers and they were in an impossible position. For some, on modest wages or in part-time jobs, their debts kept rising even as they paid back money.

What now occurs, however, is the opposite. The longer a student loan is held the smaller it becomes thanks to inflation steadily reducing its value. This creates an incentive to avoid paying back the loan.

It is poor personal economics to contribute any more than the compulsory 10% on wages and salaries. Instead, perversely, the system encourages students to borrow more than they need and then invest the money themselves.

Perhaps, at least, the time has come to inflation index the loans.

Although, in effect, students would still not be paying interest, the enormous cost of the scheme would be cut and those perverse incentives lessened.

The tweaking began last year with restrictions on loans for those failing courses, limits on the numbers of study years allowed for loan eligibility, an extension to the administration fee and a restriction on loans to New Zealand residents of at least two years' standing.

The proposed second stage, likely to be included in next month's Budget, was announced this month.

Further applications for loans from those already behind with repayments could be rejected, debt collectors would be used in Britain and Australia and the three-year repayment holiday for those going overseas is to be cut to one year.

Loans to those aged over 55 would be limited to course fees, entitlements would be reduced to trainee pilots and the ability to recall the full loan would be introduced if debtors fell behind or ignored requests for repayment.

A staggering $30 million a year has been lent to trainee pilots, with most failing to find jobs in the aviation industry. The prospects for loan repayments are poor. They are worse still for the older age group.

Theoretically, although the over 55s with little income would remain eligible for students allowances - and perhaps Ministry of Social Development support - the age discrimination is unfair. Practically, something has to be done to limit the costs.

Mr Key, who in opposition called interest-free loans "an irresponsible election bribe" - and still says the scheme is "bad economic policy" - admits the Government is tinkering around the edges. He is faced, however, by the political reality of about 600,000 potential voters with student loans.

 

 

Add a Comment