Back in April, HEPI produced two publications comparing the English and Australian student loan systems. Today, we were lucky enough to host a seminar with Professor Bruce Chapman (often described as the architect of the Australian loans system), jointly with the University Alliance and Royal Holloway.
One issue that came up is whether the cliff edge in Australia’s repayment system is likely to produce labour market problems. Down under, graduates repay a variable proportion of their entire taxable income once their income surpasses a relatively high repayment threshold (over 50,000 Australia dollars). In England, graduates repay 9% of their income above the threshold (currently £16,910 but rising to £21,000).
There is a theoretical argument that Australians might seek to avoid ever hitting the repayment threshold in order to avoid the incredibly high effective marginal tax rates that apply then. One study by Bruce Chapman himself showed the Australian system can produce a 76000% tax rate.
But one thing discussed this morning is that while some bunching of earnings does occur in Australia, it is fairly minimal and tends not to last long. Going over the cliff edge is painful, but it is not as painful as never getting a pay rise or a promotion. Moreover, while the high effective marginal tax rate might be unappealing, there is a trade-off. Unlike in England, it is quite rare for Australians repaying their loans to see their total debt rise, and loans are extinguished more quickly.
The comparisons between Australia and England are likely to continue as the Australian Government has recently announced a set of radical reforms which, in some ways but not all, would produce further convergence between the two systems (if they are passed by the Senate). Some will think the two countries can usefully learn from one another; others may think they are both too willing to experiment.
At HEPI, we will be continuing to promote this discussion when Professor Paul Wellings, Vice Chancellor of the University of Wollongong, delivers our Annual Lecture on 26th November.
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