This morning The Conversation published my argument, made last month on this blog, that HELP debt should be indexed at the lower of CPI or 4%. I argue that this is better than the other suggested ‘lower-of’ options, such as the government bond rate, the RBA cash rate, or a wage increase indicator. The Universities Accord final report chose the last option, specifically the Wage Price Index (WPI). WPI measures changes in hourly rates in the same job.

All the CPI alternatives have a relationship with CPI

A problem with all the lower-of proposals, except a fixed maximum, is that they have a relationship to CPI. If inflation starts going up the RBA increases its cash rate and government bond holders want higher interest rates to protect their real value. Workers and unions, often supported by policymakers, seek inflation compensating wage increases.

For wages set nationally, the federal government wants the minimum wage increase linked to inflation this year. If the Fair Work Commission grants this increase, minimum wage and other CPI-driven wage rises will flow through to future WPI figures.

Real wage increases, over-and-above CPI, also push up WPI. Aged care workers have recently been awarded a large real wage increase. Statistics on enterprise agreements show wage increases returning to their normal pattern of exceeding both WPI and CPI.

A common HELP indexation complaint over the last couple of years is that compulsory repayments during the financial year are not deducted prior to indexation. I explained the current system in this post last year.

In that post, I noted that one reason for not taking compulsory HELP repayments out prior to the current 1 June indexation date is that their exact amount is not yet known by the ATO. The repayment amount is calculated after the financial year ends, on 30 June, and during tax return processing. There are many reasons why HELP repayments sent via the PAYG system could be less or more than the final repayment amount.

The ATO has raised another administrative obstacle, which is that HELP repayments are not separately identified in the PAYG information it receives from employers. As the ATO collects salary information, and already knows who is a HELP debtor, it perhaps would not be that hard to infer why the amount withheld from an employee is higher than income tax rates require. But clarity on what is intended as a HELP repayment would require system re-designs for the ATO and employers. HELP PAYG information would still often vary from the final correct amount, so the system would need a reconciliation after 30 June, with corresponding adjustment of indexation up or down. This would add complexity and administrative costs. These practical issues rule out real-time reduction of HELP balances.

The Accord final report instead recommends another option, changing the date of HELP indexation. They do not, however, suggest a date.

Over the last two years high CPI-driven HELP debt indexation – 3.9% in 2022, 7.1% in 2023, probably in the vicinity of 5% this year – has been a major issue. It has brought to public attention HELP debt issues that had been waiting for their trigger.

The last time HELP debt indexation exceeded 5% was in 2001, as the the new GST flowed through into prices and an indexation rate of 5.3%. At that time 1.1 million people had HECS (as it then was) debts of about $7.2 billion. A Factiva search shows that this unusually high indexation was newsworthy at the time. But with much lower HELP balances per person than now the average debt increase was only $350. The indexation issue then went quiet for two decades, except when the government wanted to charge more than CPI.

The reason for HELP indexation’s long low media profile was that between 2002 and 2021 it averaged 2.4%. It was below 2% between 2016 and 2021. This extended period of low inflation left HELP indexation as a latent issue, as increases in HELP debtor numbers and average debts gave it far more potential to cause significant personal cost and political trouble than it had in 2001.