Potential Effects of New Zealand Limiting Government Subsidies of Post-Secondary Education

Sources:

The Dominion Post: Student Debt Plan Cuts Pay by $30

The Montreal Gazette: From Ontario to New Zealand, student protests are in season

New Zealand Herald: Editorial: Government right to tighten up on student loans

New Zealand Herald: Four-year allowance cap restricts study for many

New Zealand Ministry of Education: Statement of Intent 2012 – 2017

New Zealand Study Link: Budget 2012 - Changes to Student Loans and Allowances

OECD: OECD Thematic Review of Tertiary Education: New Zealand Country Background Report

Otagio Daily Times: Reining in student debt

Radio New Zealand: Student loan changes 'will force graduates overseas'

The New Zealand government is implementing changes in the upcoming year  to the funding of post-secondary education as a way meet the challenges of balancing rising educational costs with managing the government’s finances. In New Zealand, all post-secondary education is called tertiary education, which includes both degree-granting and non-degree-granting education. A degree granting program includes programs that result in degrees such as a bachelor’s, master’s, or a Ph.D., while non-degree-granting programs include adult education or continuing education programs. Because New Zealand places a high value on tertiary education as a means of creating both greater opportunity and greater equality, the government provides a large amount of funding for students.

 

Under the current system, the government provides financial benefits for students who need financial support. Students who demonstrate a financial need, based on the incomes of both students and their parents, are provided a weekly allowance to help cover education costs. Currently, this allowance provides for four years of financial assistance, with the option to extend four additional years for post-graduate education. Besides this allowance, students who need further financial assistance are given the option of government loans that bear no interest. To pay back the loans, borrowers who earn an annual income of more than NZ$19,084 (US$14,395.45) are required to pay 10% of their earnings.

 

Starting next year, the New Zealand government will reduce the amount of government financial aid. It will do this by keeping the four-year allowances for students with financial need, but no longer allow students to apply for the extension of four additional years. In addition, the government has implemented a four-year freeze on the parental-income threshold for allowance qualification, which is currently set at NZ$55,027.96 (US$41,508.70). As for the student loans, borrowers will now be required to repay their loans at 12% of their income if their income is more than NZ$19,084 (US$14,395.45).

 

The changes have raised concerns among student organizations and New Zealand newspapers. Although students have not responded with violent protests seen recently in the United States and Canada, New Zealand students are concerned that they will no longer be able to afford post-graduate education, particularly in the field of medicine. Local New Zealand newspaper editorials also raise concerns of brain-drain. Brain-drain occurs when small or less-developed countries lose their most educated individuals to larger or more developed countries where these individuals will earn a higher income. The largest perceived threat for New Zealand is Australia, where the government only requires students who are paying back education loans to pay 4% of their income if they earn more than Aus$48,000 per year (US$46,861.45).

 

The New Zealand government intends to address these concerns. By reducing the benefits provided to students, the government will save an estimated NZ$70 million per year, which it will reallocate within the tertiary education system to promote math, science, and engineering. In concert with this reallocation, the New Zealand government will also employ collection agencies to seek repayment of student debt for New Zealanders who have left the country to seek employment elsewhere. Both efforts seek to help the tertiary education system remain financially stable and prevent brain-drain.

 

In this way, New Zealand is attempting to balance financial viability in its tertiary education system by reducing student benefits while putting in place measures that will maintain an educated population.

New Zealand Reserve Bank Holds Interest Rates Steady

Sources:

Bloomberg Businessweek: Bollard Signals Longer N.Z. Rate Pause with Inflation Contained

National Business Review: Bollard Holds OCR at 2.5%, Signals Higher Bank Funding Costs

New Zealand Herald: Bollard’s Arms Stay Folded on OCR

Reserve Bank of New Zealand: What is the Official Cash Rate?

Reserve Bank of New Zealand: Official Cash Rate (OCR) Decisions and Current Rate

On Wednesday, the governor of New Zealand’s Central Bank, Alan Bollard, announced that the Central Bank will hold the Official Cash Rate (New Zealand’s base interest rate) at a record-low of 2.5%, the rate it has been at since March 2011. Mr. Ballard cited weak economic growth due to worsening global economic conditions and lower than expected inflation in the fourth quarter of 2011 as reasons to keep the OCR at 2.5%.

In New Zealand, commercial banks hold accounts at the Central Bank which they use to pay the money they owe to other commercial banks after exchanging assets throughout a business day. The Central Bank pays commercial banks the OCR—currently 2.5% interest—on the amount of money a commercial bank has in its account, and charges the OCR if a commercial bank needs to borrow money to pay other commercial banks it traded with throughout the day. For example, if Bank A sold Bank B $200,000 worth of bonds, Bank B may have to borrow money from the Central Bank to pay back Bank A; the Central Bank would charge the OCR, or 2.5%, on this borrowing.

Although the OCR does not dictate market interest rates in the New Zealand economy, it has a strong influence. As an illustration, commercial banks may find it difficult to lend money at interest rates higher than 2.5% because other banks, which can cheaply borrow money from the Central Bank at a 2.5% interest rate, will quickly undercut an interest rate higher than 2.5%. Alternatively, a commercial bank is not likely to lend money at an interest rate lower than 2.5% because it could receive 2.5% interest by keeping its assets in its account at the Central Bank. Therefore, market rates tend to settle around the OCR.

In December, analysts expected the Central Bank to raise the OCR in early 2012 to encourage commercial banks to hold money in their accounts with the Central Bank, which would slow inflationary pressures by encouraging banks to save money, thereby decreasing demand which would lower prices and decrease inflation. However, a January 19th report revealed that the consumer price index (a measure of how much money it costs to buy certain goods and, therefore, a measure of inflation) rose only 1.8%, below the midpoint of the 1% to 3% inflation rate that the Central Bank has targeted in accordance with a Parliamentary mandate to set an inflation target. Since inflation was lower than expected and the economy is still growing at a slow rate, the Central Bank decided not to raise the OCR. By keeping the OCR low, the Central Bank hopes to encourage banks and consumers to continue to spend, rather than save, thereby increasing economic growth and inflation (higher demand will push prices up) to the target level of 2%.

According to Mr. Ballard, inflation will naturally settle at the target level of 2% and economic growth will increase due to the ongoing reconstruction effort in the region of Canterbury. Canterbury has been struck by a series of earthquakes since September 2010, including a February 2011 earthquake that killed 181 people. A large-scale reconstruction effort is scheduled to begin in early 2012, and the additional demand for commodities will likely increase inflation to the 2% target and increase economic activity.