Funding in the Age

I have an opinion piece in today’s Age about the use of income-contingent loans to fund various programs. They sadly cut my call from a government-wide inquiry into areas where these can be deployed.

Who pays for summit schemes?

Joshua Gans, The Age, 22nd April, 2008

Funding the proposals raised as many questions as answers at the 2020 Summit.

ONE of the many issues that raised its head during the 2020 Summit was the funding of the schemes put forward by participants. Amusingly, some non-economic streams thought up a “cost-neutral” idea to fund, say, an arts program, by imposing a small levy on house sales for a year. Another proposed taxes on beer and junk food to fund health programs; something that would disproportionately hurt the poor. There is a difference between “funding” and “costing”.

I was in the productivity group of the summit, dealing with things such as education and science funding as well as workplace participation. It was keenly appreciated that “cost neutral” meant “little cost to anyone”. But what was also clear was that some benefits were going to take money. The question was: how do we fund those, taking into account both efficiency and equity? And given that many things we discussed had private as well as public benefits, getting the balance right was critical.

Take parental leave. Everyone appears to agree that parental leave is a good thing. But there are a myriad of issues. First, it benefits children by facilitating parental involvement and is thus potentially good for a child’s development. Second, parental leave is something parents want — they want an opportunity to pause and build their families free of work constraints, so in this regard, there is a call for rights.

But there is also the fact that a right is of little value if it can’t be exercised because, for example, you can’t afford it.

Solutions then move towards getting someone other than the parents to pay for the time off. But if you charge the government, you are drawing a benefit from those who don’t have children to provide something for those who do. If you charge employers, you potentially reduce their incentive to hire people who want to be parents. That is hardly desirable.

Another idea was to charge parents themselves, as responsibility for a child’s development lies with them.

Recognise that this is the same issue students face when going on to higher education and we are on our way to a solution: why not extend a line of credit to new parents to give them time off work and recover it through the tax system when they go back? This was an idea put forward by the architect of the Higher Education Contribution Scheme, Bruce Chapman, and in principle, it makes sense; the idea of providing a mechanism to fund an activity with clear private benefits is both equitable and efficient.

And this is just the tip of the iceberg for “income-contingent loans” for entitlements. There are proposals in housing, paying fines, starving artists and climate change. If we are thinking taxation reform, then our world-leading experience with HECS-like policies is the big idea on the table.

It is the role of government to provide a means for people to take responsibility for their investments. Using the taxation system to promote and enable responsibility would be a sea change in the way we view what society owes us.

Joshua Gans is an economics professor at Melbourne Business School. He blogs on these issues at www.economics.com.au.