The news yesterday that a man was killed by police during student protests calling for free education is a tragic reminder of the numerous and heavy costs of the state’s refusal to fund free education. In this article I will outline why funding education is affordable, why it will lead to higher productivity, employment and growth, and why it will result in a lower inflation to growth ratio. I will also explain why Treasury and the South African Reserve Bank are constitutionally bound to fund education.
The constitution of South Africa states that
Everyone has the right –
(a) to a basic education, including
adult basic education; and
(b) to further education, which
the state, through reasonable
measures, must make progressively
available and accessible.
This means that government must do everything within its reasonable power, to fund and deliver education for all. Treasury is bound by this obligation.
The constitution of South Africa also states that
The primary mandate of the SA Reserve Bank is to protect the value of the currency in the interest of balanced and sustainable growth.
The SA Reserve Bank (SARB) is the organ of state which has sole right to issue Rands. The SARB creates Rands when it lends to banks or to government. There is no limitation on the amount of Rands it can issue in order to achieve its end goal of balanced and sustainable growth, other than that it must keep inflation low.
Education is disinflationary
As long as the money being invested into education is being efficiently used, investing in education is net disinflationary. Education leads to more productive workers and business leaders / entrepreneurs, resulting in increased local production of energy, goods and services. Increased locally sourced supply of energy, goods and services results in lower prices, less imports and more exports. This protects the value of the currency in the interest of balanced and sustainable growth. Increased exports and reduced imports also result in less net South African (private sector + public sector) debt and more savings.
Because efficient investment in education is net disinflationary, and leads to more balanced and sustainable growth, the SARB is constitutionally obliged to fund it.
There are various ways the SARB and Treasury could fund education. I’ll outline some options below. If you don’t understand how bank lending and government spending involves money creation and how taxes and repayments of loans destroys money it might help you to read this article before we continue.
Education funded by private bank lending
One measure being proposed is to fund education through private banks issuing low interest student loans (creating money), which are backed by a guarantee from treasury. Those students that go on to earn above a certain threshold pay back the loans, and treasury pays back the rest. In this scenario, broad money (bank credit) is created by the issuance of student loans and that money is destroyed when the loans are repaid and when taxes are paid on increased incomes, sales and profits. While this scenario is viable, it is a bit more complicated than the alternatives below.
State funded public education
In this scenario, the state spends Rands into existence on building schools, colleges and universities, and employing teachers. Those Rands add to private sector savings and as they are spent onwards, increase private sector sales, profits and incomes, which are all taxed, destroying those Rands within a few transactions. The drawback with this scenario is that the poor will still be reliant on government schools, which have a poor track record.
The voucher system … an elegant alternative
Another possible way to fund education is for government to issue digital education vouchers to all learners for a certain amount each year. The learners / parents can spend the vouchers at any school (public or private) or university. I like this scenario because it means state and private schools compete against each other to attract learners, ensuring more efficiency and better quality education. If the state fails to provide adequate schools and teaching staff, the private sector can step in to fill the void. Digital vouchers have the added benefit of being easy to track. This assists in the collection of statistical data and in reducing corruption.
The schools redeem the vouchers at their banks who in return redeem them in at the SARB. This will result in an increase in broad money supply (deposits in accounts at banks) and base money supply (bank reserves held at the SARB). As those bank deposits (private sector savings) are spent onwards, they increase private sector sales, profits, and income, which are all taxed (destroying deposits and the reserves backing them) until after a few transactions those Rands will cease to exist.
As you can see, each of the above alternatives involve the creation of new money to fund education. If you are against SARB funding of government spending on education on the grounds that it involves “printing money”, are you also against banks issuing low interest student loans which creates money too? You should not be against either. Issuing currency to fund investment that increases productivity is disinflationary, whether it is the private sector or the state doing the investing, as long as it is spent efficiently. I would argue that the voucher system above is the most efficient way to fund education even though its funded by state spending.
We can’t afford not to educate
When the state spends Rands into private bank accounts on eduction, private sector savings increase, and when those savings are spent onwards on the goods and services the rest of us sell, or invested, our companies’ sales and profits increase, as do our incomes and savings. Increased profits, and a more educated / productive workforce, incentivises productive investment by the private sector, and increased savings funds that investment. Productive investment in turn increases production, employment and growth. The resulting increase in supply of local sourced energy, goods and services limits the increase in their prices. Increased exports and reduced imports strengthens the currency, and reduces net South African (private + public) debt while increasing savings.
Remember, when Rands the government spends into existence are spent onwards by their recipients, tax on those transactions, and the profits and incomes they generate, return those Rands to the state (destroying them) within a few transactions. Till then, they just add to private sector savings.
The question we should be asking is not, “Can we afford to educate our kids”…we clearly can…but rather “Can we afford NOT to educate our kids”?
The rich and upper middle classes already know the answer to this question. Private schools and top government schools with annual fees of over R50 000 per year are over subscribed.
Isn’t it it time treasury and the SARB carried out their constitutional duty to ensure our poorest children are not left behind? We will all pay the consequences if our poorest are left behind, and those costs will not just be financial.
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