Finance is changing our lives. Through mortgages and super we now have more debt, and more savings, then ever before. In this article Ben Spies-Butcher explores how financial ways of thinking are changing the way policy makers think and make policy, particularly in relation to HECS.
Finance is changing our lives. Through mortgages and super we now have more debt, and more savings, then ever before. The expansion of financial markets – what sociologists call ‘financialisation’ – creates new winners and losers. It even changes how we think about social rights. The biggest growth has come by shifting social protection into the market; super for pensions; mortgages for housing; student loans for education. That places finance at the centre of social policy.
But not all these financial markets are the same. Gareth Bryant and I have been researching a particular kind of finance – income-contingent loans, commonly known as HECS. HECS is different to normal debt. It is issued and held by the government, not a bank. And it has rules that protect students from default (unlike the more pernicious loans in the US). At the same time, HECS is what allowed governments to reintroduce fees for university – and then expand those fees over time.
We are particularly interested in how financial ways of thinking are changing the way policy makers think and make policy. This is not as straight forward as some critics think. HECS-type loans, for example, are used in some countries to replace bank loans. That means they shrink the finance sector. These changes reduce repayments for low-income graduates (who do not earn enough to make repayments), aiding equity.
The way these types of new policies develop, however, differs. In the US these loans are largely used to manage the risk banks face of default – when students fail to repay – rather than to protect students. Repayment thresholds are close to the poverty line and the loans are managed by private firms (backed by government). The loans do little to expand access to universities, but rather address a crisis facing lenders (much as government policy after the GFC bailed out the banks, not those with mortgages).
In Australia, increases in the repayment threshold helped to protect many low-income students, while novel accounting techniques allowed governments to expand university places and access much more rapidly than the actual repayments made by students could ever justify. Our scheme is entirely public, while in the UK the Government has just started to sell their student debt to international finance (repackaged as complex derivatives).
These different experiences mean what looks like the same policy can function in very different ways. Understanding those differences can help us understand how political battles over social policy are changing. Without new tools, we risk missing important policy changes that sound technical but can have real long-term implications for equity and access.
Just such a debate is currently happening in Australia. The Government is proposing to lower the repayment threshold for student debt, change indexation rules and limit access to loans. The justification for these changes is based in the language and thinking of financial markets. Unpaid student loans are seen as ‘bad debts’ or ‘underperforming assets’. These rules simply ensure student loans look a bit more like other loans.
Our research shows this misunderstands how student loans work. These ‘loans’ are not really financial products at all, but an innovative form of social policy that lies somewhere between what we normally think of as ‘debt’ and as ‘tax’. Thinking of HECS as a pseudo graduate-tax implies that lowering the threshold for repayment is more like increasing taxes on younger, low-income workers; just as the same government is planning to cut taxes for large corporations. It also highlights that sometimes the way debt is repaid can be more important than the size of the debt itself.
A similar political contest is happening elsewhere. The language of savings and investment – used to promote tax concessions for housing and super that so dramatically favour the rich – is also being used to promote early intervention. The ‘social investment’ model draws on the language and concepts of finance to highlight the economic benefits of equality.
There are risks and opportunities in these approaches. Focusing only on economic or fiscal benefits risks undermining the political claim for justice; while creating new opportunities for finance to exploit the poor. But it can also create possibilities to win arguments and funding that is not otherwise available. It can demonstrate how social policy pays for itself, if only given the chance.
For us, it highlights that we need to take this process of bringing finance ‘inside’ the state seriously. It is not an abstract theoretical debate– it is the new and very real battleground of policy making. It is clear to us that neither the way economists, nor social policy scholars think about these changes quite works. We need tools to help us understand those risks and opportunities – to know when to take advantage and when to fight back.
Posted by Luke Craven.