By Ben Spies-Butcher and Gareth Bryant
The coronavirus pandemic highlights how uncertainty and fear can quickly translate into panic and crisis in the economy. For individual businesses faced with potentially falling revenue, it appears to make good sense to be cautious and cut back on spending. But for the economy as a whole, this reinforces the downturn as spending falls everywhere.
The announcements by the federal and NSW governments to deliver stimulus confirm the unique role of public spending in avoiding recession. What us unusual about this crisis is that universities are at the frontline and among the first to consider spending cuts – this from a sector we usually consider to be public. Across the country, universities are considering freezing staff hiring and halting building works, taking much needed money out of the economy.
Universities are now vital to Australia’s economy. Higher education is Australia’s fourth highest earning export sector, behind coal, iron ore and natural gas. It brought in $35 billion in 2018. Much more than primary industries, universities are also a major employer, with 217,500 people employed by them in 2017-18, including some workers most exposed to a downturn. They directly employ tens of thousands of casual staff and indirectly support thousands more in other industries such as construction. This means university spending cuts reduce many people’s incomes and overall economic demand.
In contrast, announcements of temporary school closures have not led to the same cuts in spending. Public school funding continues even as private spending in the economy falls. Public institutions have a unique ability to weather bad economic times. It makes no economic sense to cut school or hospital budgets in a recession and just by keeping this spending going, the public sector plays a crucial role in easing the downturn.
Even though we think of universities as public, their increasing reliance on private income, especially from international students, leaves their cash flow more exposed to changes in demand. By forcing universities to seek out private income, governments have encouraged them to increasingly think and act like private entities. As a result, universities have sought to cut back spending to manage the drop in expected revenue from international students caught up in travel bans.
Surprisingly, private financial markets view universities somewhat differently. Credit ratings provide an assessment of how confident investors should be that an entity can pay its debts. The global ratings agency Standard & Poor’s rates many Australian universities in the AA to AA+ category (the second highest rating behind AAA). This places these universities on par with the governments of countries such as France, New Zealand and Britain as well as several Australian state governments in terms of their credit worthiness.
Strong credit ratings allow universities to borrow money at very low rates over long periods of time because international creditors view them as having a low risk of defaulting. University credit ratings are underpinned by the dominant role public finance continues to play in the sector. This reflects a quirk in the other main source of university funding – the fees charged to domestic students, which are largely deferred through HELP, our system of student loans.
While student fees appear to be private income, for the purposes of university financing they operate differently. Domestic students do not typically pay universities up front, as international students do. Instead, governments directly pay universities on behalf of the majority of students and will continue to do so through the crisis. The guarantee of future public financing helps assure financial markets that lending to universities is a safe bet.
Universities are facing a short-run cash flow challenge, not a structural decline in income. They can therefore play a more “public” role in helping the Australian economy. Rather than making cuts to balance their budgets, universities can deliver their own fiscal stimulus. Like governments, universities can spend money to keep people in jobs and our economy going in tough times, financed by long-term borrowing that can smooth the short-term impact of the crisis.
Individual universities can act to shore up spending. However, for their spending to be most effective as fiscal stimulus, it must be co-ordinated across the sector. This gives governments a unique opportunity to expand their stimulus packages by assisting universities to borrow and spend. The federal government could increase the capacity of universities to borrow now by committing to increased funding in the future. Even a modest future commitment, such as to increase student places or per-student funding, would allow universities to use this commitment as collateral and spend much more now.
Such a move would make good political sense by helping the government meet its macroeconomic and fiscal targets. Because any commitment would be primarily in the future, it would have little impact on this year’s budget and, because the borrowing would be done by universities, it would not increase government debt.
The government could tie such a commitment to promises from the universities to keep spending through measures such as lifting staff freezes, keeping casuals employed and proceeding with building works. This would give governments a new fiscal policy tool to keep people in work and the economy moving.
Ben Spies-Butcher is Associate Professor and Head of the Sociology Department at Macquarie University.
Gareth Bryant is Senior Lecturer in Political Economy at the University of Sydney and Economist with the Sydney Policy Lab.
First published in the Sydney Morning Herald