Should government benefits be increased when university fees go up?

Fairfax has a story this morning on the hidden cost of deregulating university fees. Higher education is included in the bundle of goods and services that make up the consumer price index, which in turn is used to index a wide range of government welfare benefits. So if fees increase the CPI will go up, driving up the cost of the social security system. This was an issue in England when their university fees went up.

I am quoted in the story as saying that the government could exclude university fees from the index. I was challenged on Twitter about this.

The CPI is based on a basket of goods and services consumed by households, with the primary input being the ABS Household Expenditure Survey. A well-known criticism of this is that consumption patterns vary significantly between household types. For this reason, the ABS also calculates a range of other indexes for different household types, especially different categories of government beneficiaries. An aged pensioner index has been used, but only when it is more than CPI.

Given that the purpose of indexation is to maintain the real purchasing power of benefits, it is not clear why people should be compensated for an increase in prices in a commodity few of them other than Youth Allowance recipients are likely to consume. This is a general point about the choice of indexation methods, not one just restricted to this particular issue. But there could be special legislation to at least avoid the once-off major spike in prices after the system changes increasing government expenditure on welfare benefits.

Update: Some of my economist colleagues are more sceptical of the inflationary effects. They argue that the Reserve Bank has an inflation target and they take policy action to keep CPI within it, even though it is common for there to be price spikes in particular services or commodities. So while the cost of higher education would go up, this could be offset by price stability or reductions elsewhere.

One thought on “Should government benefits be increased when university fees go up?

  1. I disagree with your colleagues. Although it’s not explicit, the RBA’s inflation target is a means to an end – stabilisation of business cycles – rather than literal price stability per se, and the RBA interprets the target accordingly. Therefore, the RBA tends to ‘look through’ one-off non-demand-related shocks such as the introduction of the GST and carbon tax, or a sudden depreciation of the dollar. I would expect the same would apply to a big bang fee deregulation. Conversely, if fees were liberalised gradually, it’s less likely the RBA would find it practicable to look through the (say, annual) increases. Rather, the RBA would seek to push down growth in other prices like your colleagues suggest. That is effectively how the RBA reacts (wrongly, in my view) to annual private health insurance and electricity rate increases.


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