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A HECS on everything

By Andrew Leigh - posted Monday, 12 May 2008

With budget season upon us, stand ready for interest group after interest group to picture the government as kind old Uncle Oz. He gives to so many, they will argue, so why not to us? Surely a few more dollars to our special cause couldn’t hurt? (Cue heartrending description of flashy infrastructure project, photogenic industry, or working family.)

The problem with this notion is that most kindly uncles don’t come knocking on the door on October 31, asking for a tax bill to pay for next year’s goodies. So rather than focusing on government’s role in distributing largesse, some economists - chief among them Australian National University economist Bruce Chapman - have argued that we should think of government as a piggybank, helping us to manage risk and uncertainty over our lives.

Chapman’s leading contribution to policy has been the Higher Education Contribution Scheme. Adopted in Australia in 1989, HECS requires students to pay back a portion of their university tuition when their earnings pass a given threshold. If earnings drop below the threshold, no repayment is required. By requiring students to contribute to the cost of their education, HECS recognises the substantial private benefit to attending university. Its “study now, pay later” approach helps smooth income over the lifecycle, and ensures that the poor are not prevented from enrolling.


Since 1989, HECS has been taken up by Ethiopia, New Zealand, Thailand, and the United Kingdom. Having had more influence over worldwide policy than any other Australian economist of his generation, one might have thought that Chapman would retire to the ivory towers. But instead he has set about applying the same idea - loans instead of grants - to a wide variety of policies. Here are just a few.

HECS for drought relief

When heavy rains reduce profits in beachside resorts, policymakers typically do nothing. Yet when drought hurts farmers, the government is ready with a handout. Politically, it is unlikely that we could scrap drought assistance programs. But a better way to deliver it would be through income contingent loans, repayable in good times. So long as loans are targeted towards farms with viable long-term prospects, they would help reduce volatility for farmers, while requiring those who are able to repay the loans to do so.

HECS for sportspeople

For those lucky enough to win a place, the Australian Institute of Sport offers elite athletes one of the best training programs in the world. Partly as a result, many AIS graduates go on to perform at the elite levels of their sport. Yet AIS graduates with seven-figure earnings - among them Lleyton Hewitt, Mark Viduka and Jelena Dokic - are not required to pay back a cent of the cost of their training. If a HECS-style loans scheme was put in place for elite athletes, the size of the AIS could be significantly increased with no additional cost to the taxpayer.

HECS for parents

Once upon a time, assistance to families went only to the poor. Over the last decade, changes in the Baby Bonus, Family Tax Benefits and Child Care Benefits have seen family payments grow steadily more generous for the middle and top of the income distribution. Yet Australia remains one of the few developed countries that without government-funded paid maternity leave, prompting calls for another family payment to be introduced.

One answer would be for government to offer paid maternity leave through an income contingent loan - thereby providing families with more money at the time of life when they need it most, without unfairly redistributing resources from poor singles to rich families.

HECS for fine defaulters

When it comes to collecting fines, governments are the world’s worst debt collectors. One study estimated that the Victorian government managed to collect just 44 per cent of court-imposed fines. Because we are reluctant to send non-payers to jail, and because enforcement often costs more than the fine itself, the justice system is left impotent in the face of rampant non-payment. In the same way as the taxation system is used to deduct Child Support payments from the incomes of non-custodial parents, it could be used to ensure that recalcitrant criminals paid their debts.


Once you start thinking about government as piggybank, the world starts to look very different. (You may find yourself asking questions like “if artists want more money, why not replace grants with loans?”)

Fundamentally, Chapman’s simple idea accords with the Australian ideal of a fair go: helping people in their time of need, but also expecting them to give a little back when times are good. For a government with more ideas than dollars, expanding income contingent loans might be just the solution.

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This article was published in the Australian Financial Review on May 6, 2008.

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About the Author

Andrew Leigh is the member for Fraser (ACT). Prior to his election in 2010, he was a professor in the Research School of Economics at the Australian National University, and has previously worked as associate to Justice Michael Kirby of the High Court of Australia, a lawyer for Clifford Chance (London), and a researcher for the Progressive Policy Institute (Washington DC). He holds a PhD from Harvard University and has published three books and over 50 journal articles. His books include Disconnected (2010), Battlers and Billionaires (2013) and The Economics of Just About Everything (2014).

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