This post by Tim Cullinane, Independent Tertiary Institutions Chairperson, is the third in our series of guest posts from sector groups on the 2010 Budget.

Many years ago, Budgets were closely guarded political secrets with successive Ministers of Finance zealously guarding every detail.  As a result, the Budget Day speech was the first time most people heard new policies and spending announcements. 

In recent times however, the pendulum has swung the other way and the fashion is for predictable Budgets – even ‘boring’ Budgets.  Governments now make more pre-Budget announcements and send multiple signals – some coded, others very clear – about the tone and content of an upcoming Budget.  Usually this is done to dampen down expectations.  Not living up to expectations is today considered a major political crime.

The tertiary sector therefore has a reasonable idea of what will be in Budget 2010.  Rather than propose a policy wish list, this post sets out the Independent Tertiary Institutions (ITI) response to what we expect to see in Hon Bill English’s second Budget.

The clearest signal is that there is not going to be any new money for tertiary education.  Most other spending areas have received an identical message – our sector is not being singled out.  In these tough economic times, the Government has made the call to control Government expenditure and work on improving value for money.  The draft Tertiary Education Strategy made this point firmly but the message was strengthened significantly in the final version after several groups reportedly said they agreed with the need for fiscal restraint – just not for their particular area.

We expect the overall level of tertiary education funding to remain basically static with the Government’s focus remaining on how the money is used.  There will be some savings which will be reinvested and we expect to see several moderate spending announcements – mainly for universities – and several new policies around governance – mainly for ITP mergers but with some changes for the ITO sector possible or at least foreshadowed.  One area which should receive additional funding support is language, literacy and numeracy.  Gaining these skills is still vital for many students if they are going to succeed in the modern economy.

One over-arching issue is whether tertiary providers will continue to receive an inflation adjustment on their SAC funding.  We expect that this will either be dropped or progressively phased out.  The Government will argue that is not possible to control costs with automatic increases in such a large section of the appropriation. 

Clearly such a decision, if it eventuates, would create difficulty for all providers who will see their effective funding reduce over time.  The impact will be amplified by the expected increase in GST to 15%.  While providers will be allowed to increase fees by the same amount, they will in turn be faced with higher prices for all the goods and services purchased. 

The potential good news is that we expect to see a significant loosening of the fee maxima regime.  Our expectation is that providers will have more scope to set their fees appropriately with increases of up to 4-5% per annum allowed.  We also anticipate any exemptions or appeals process will now include PTEs.  We are currently excluded from fee maxima exemptions for no valid policy reason.

Details of the precise mechanisms involved in changes to fee maxima will be important, particularly how the Government intends to achieve their stated aim of maintaining student affordability.  It would be a concern if Crown agencies became too involved in deciding the ‘correct’ level of fees for specific courses. 

The second clear signal from Minister Joyce is that he will introduce an element of performance-based funding.  ITI welcomes this move.  Having funding linked to performance has long been one of our core policy tenets.  The amount of funding involved will start relatively small at about 5% but it sends the right message.  Although the system will start next year, we do not expect the details to be announced at the Budget as we believe they are still being worked through.  Similarly, we are optimistic that the Government will announce later in the year a solution to the 103% “over-provision” which recognises the unique historical circumstances in the PTE sector.

Having stated ITI’s support for funding following performance, we have three potential concerns with this policy.  One, the performance data must be accurate and it is fair to say TEC’s record in this area is patchy.  Two, the correct performance measures must be used.  ITI is concerned at the absence of a labour market outcome (jobs) indicator at present.  This omission means there is a real risk of under-reporting the performance of some providers and indeed whole sub-sectors.  Three, the system needs carrots as well as sticks – there need to be incentives for high performance.  It is not enough for the highest performers to simply be ‘rewarded’ with their full allocation of funding.  Making some of the money freed up from poor performers available to top performers will help make the PTE sector more dynamic and responsive and allow the best institutions a pathway to modest growth.

The issue of depreciation on commercial buildings is of interest, particularly to the PTE sector which is responsible for all its capital costs.   It seems certain that there will be changes in this area for residential (or specifically rental) properties.  Initially it seemed as if the change would extend to commercial properties.  Removing the ability to claim on the depreciation of a commercial building would raise costs for most private providers, either directly as owners or through increased rents.  We are optimistic that the business lobby – led by Business NZ – has successfully taken this issue off the table.

Overall, ITI does not expect Budget 2010 to be pretty or exciting.  Given the financial situation, we expect it to be tight, disciplined and focused.  Parts will be unpopular with certain groups.  The ultimate judgement will be about whether the Budget, as a whole, is good for the country.