Section A: The crowding out effect.
Crowding out is where an increase in government expenditure causes private investments to decrease. In other words, the private investment is “crowded out” by the government expenditure.
When government increases their expenditure on education, two things happen at the same time. At first, the total production / gross domestic product (Y) increases. This is the primary effect. The change in Y then increases money demand which causes the interest rates to increase. The increase in interest rates discourages investment over time which then causes the GDP (Y) to decline. This is the secondary effect. The secondary effect is weaker than the primary and could be the reason why this decision was taken to increase spending on education.
If the budget deficit increases too much due to the increased expenditure and the decreased investments, the government will need to look at reducing this. One way is by increasing taxes, which is what has happened in South Africa this year when the VAT rate was increased from 14% to 15%. When the deficit reduces, the interest rates reduce and the economy starts looking good for investors again.
The government can also finance its budget deficit by printing new money. This also reduces the crowding out of private investment and then spending will increase without reducing consumption or investment.
Another option to reduce budget deficit, would be for the government to borrow money. This unfortunately doesn’t eliminate the problem, but shifts it on to future generations who will have to pay back that money at some point.
Section B: Arguments advocating for free education
In 2015, South Africa was rocked by protestors against the high cost of tertiary education in the country. These protests which were sometimes peaceful but sometimes violent and eventually got the attention of the right people. Just before his exit as our president, Jacob Zuma astonished everyone with his announcement that free education would be implemented from 2018.
Advantages of free education:
• Economic growth. The single biggest advantage of free education. Investing in the education of our benefits the country in the long run. Our universities will produce more graduates. More skilled workers in the country reduces the number of unskilled workers and overall unemployment and is good for the economy over the long run.
• A more educated population promotes more understanding, communication and tolerance. Qualities that a country as diverse as South Africa is desperately needs.
• Upskilling more of our population will attract investors which brings more money into the country
• Everyone gets a fair chance to obtain higher education. Not just those with money will benefit, but even those from poor households who have the necessary knowledge and abilities will get a chance. People that enter the job market after completion of their studies will be there based on merit and not on how much money their parents have.
• In an interview with HuffPost SA, the director of the Centre for Emerging Researchers’ Mukovhe Morris Masutha said that free education will eventually pay for itself. This is an investment which will turn more citizens into active participants in the country’s economy. “Our economy is currently performing poorly as a result of low investment –– people don’t invest in SA, because it is expensive to invest in the country. Ensuring that the bulk of our population is skilled will lead to attracting investment into SA, thus making money for SA.”
On the other hand…. (disadvantages of free education)
• A person who gets something for free doesn’t always value it as much as the person who has had to pay for it. Especially at the common age of university entrants. When parents are paying for their child’s education, they generally put enough pressure on the child to perform well so as not to waste their money. They have a vested interest. Parents who are not paying for this privilege might not give the child the support that they need during their studies.
• When education is free, there are a lot more capable learners filling up the university classrooms. Smaller and more intimate classrooms provide a much more individualized type of learning environment which is beneficial to the learner.
• Nothing is every really free, is it? Somebody has to bear the financial burden. In our case, a lot of the funds have been redirected from other budgets leaving those areas short. If one considers the already shocking conditions in which our prison inmates live, a cut in the incarceration budget further affects them and the hard working and underpaid prison authorities that work in that sector.
• Increases in our VAT from 14% to 15% to cover our budget deficit and the free education policy has a very serious affect on low income earners. The proportion of a person’s income on VAT expenditure is higher for someone earning R2 000 a month than someone earning R20 000 a month. Ripple effects of a VAT increase includes higher cost of living such as transport and groceries. This leads to reduced spending by the public because we don’t have as much money to spend as we did before and this in turn negatively affects the economy.
• Government will not be issuing a blank cheque to students. The free education model can only be made available by selected universities to cover costs at predetermined and agreed levels. This will result in other institutions increasing their fees to astronomical prices to cater for those prepared and able to pay top dollar. That institution can ten afford the top lecturers and facilities which then creates a service gap between themselves and the institutions which are funded by government. Consider the difference in the type of medical treatment received currently in a private hospital vs what one receives in a state hospital. Other than a more delicious menu option, the quality of healthcare between the two should not be so different, but it is.
In February 2018, Finance Minister Malusi Gigaba announced in his budget speech that R57-billion over the next three years has been earmarked to pay for the free education for students who come from poor or working-class. This is over and above the R10-billion which was provisionally set aside in the 2017 budget.
Where will this money come from? Much of the money will be funded from cuts in existing government spending such as the Special Defence Account, Incarceration, Air Defence and Trade and Industry. Funding to Sanral, Sars, Prasa and four water boards has also been reduced as well as to school infrastructure, education infrastructure, human settlements development and provincial roads maintenance.
The rest of the money, and money required to reduce our countries existing deficit, will come from an increase in the VAT rates.
Section C: Discussing free education for the poor
According to the case study in the assignment question, current government funding has not been able to keep up with the growing number of students. In order to maintain quality of education, universities have had to charge the students higher fees to maintain the quality of service that they provide. The universities who are able to raise additional funds to keep the quality of their education high results in the poorer students going to under performing universities and the rich students still benefiting from better quality education.
We will also find that children who were educated at primary and high school levels in public schools in poorer communities do not receive the same basic education as those with money who went to private schools, with tutors, individual lessons and newer textbooks. This means that those students enter university with lower marks and have to work a whole lot harder than their counterparts who benefited from a better educational background.
Tertiary education was free in Chile until 1981. The military dictator at the time allowed private institutions to emerge with no restrictions on how much fees they could charge. According to the Organization for Economic Cooperation and Development, this resulted in Chile having the fourth most expensive university system in the world.
Student protests in 2011 against the cost of higher education and student debt resulted in the country adopting a tuition free policy in 2016. One of the limitations to this policy to limit the costs, is that access to this is not available at all facilities and some facilities chose not to participate in this.
A paper published by Alonso Bucarey, who is an economist for Amazon, in January 2018 studies the effect that the free education policies in Chile has on students who already receive financial aid currently. He goes on to explain in this paper that the number of students who currently receive financial aid already have access to higher education. If the college costs reduce across the board due to the government funding, the middle and higher-income group of students will be able to apply to colleges which cost a lot more. He believes that these students might end up crowding out the lower income students because they have lower than average test scores.
He further goes on to explain, that when there are a lot more students applying for the same popular field of study, the facilities will have to become more selective and those students from the poorer backgrounds who didn’t receive as good of an education as some of the others will no longer qualify to study in their chosen field.
Bucarey argues in his paper that free education increases demand for certain programs which then pushes the price up to unaffordable levels for low-income students who would have normally qualified for them. He further estimates that 20% of the poorer students who are currently enrolled at the universities with financial aid will lose their sets to wealthier students under this new free education policy.
The growth of South Africa’s economy is not as it should be. We have a long way to go in educating and upskilling our youth to the benefit of the economy and our future generations. While it can be seen that free education will have plenty of pitfalls and might create new problems which need to be addressed, it is clear that as a country, we could not continue with out tertiary education being funded the way it has been.
It is a great pity that the students felt the need to cause such widespread destruction in their efforts to be heard, but it would be encouraging to see those same students taking the opportunity of free education that they have fought so for and making the most of it. I personally feel that if government wasn’t haemorrhaging so much money on wasteful and corrupt spending, the financial implications of this move might not be so great and we would reap the benefits of this decision much sooner.