Why both Labor and Coalition are wrong about their claims on the economic value of education

School education made headlines during week one of the election campaign. Over the past week, both major parties made claims about how much – or how little – the economy would benefit from their spending on schools. But both Labor and the Coalition over-stated their claims. Here’s why.

What happened last week?

In trying to build its case for increased spending on schools –the so-called Gonski funding – Labor over-reached and got caught out.

Labor was wrong to try to link its education policy to an OECD economic model that suggested better education could, over time, boost the Australian economy by 2.8%.

The report in question, Universal Basic Skills: What Countries Stand to Gain, models the economic benefits of a range of hypothetical scenarios from raising skills in education. But the report never attempt to estimate the benefits of Labor’s policy proposal.

Labor leader Bill Shorten was also wrong to claim an immediate improvement to GDP from his party’s education policy. This is clearly incorrect; the future boost to GDP comes from better skills as school leavers enter the workforce, and this takes time. He and his advisors should have known better.

Yet in its desire to paint Labor as economically illiterate and/or irresponsible, the Coalition over-reached in the other direction.

Finance minister Matthias Cormann led the Coalition charge, claiming “Bill Shorten deliberately misrepresented the OECD data”.

Standard rhetoric during an election campaign. But he over-reached when he said:

“It did, indeed, point to a 2.8% growth effect in 80 years, by 2095…”

Ignore for a moment that the OECD model estimated the benefit in 2095 at 11% rather than 2.8%. The real issue is that it is just as misleading to imply that we need to wait 80 years for any benefit as it is to say that the full benefits occur immediately.

When do the benefits kick in?

While the benefits from education are slow, significant returns kick in over the medium term.

Under the assumptions made in the OECD model, the economy would be about 0.7% larger in 20 years' time.

The boost to GDP is 1.5% by the 30-year mark, and 2.7% by year 40. From there the benefits snowball. But as with any economic model, the further out you project, the more wrong you are likely to be.

We have checked our rough estimates with professor Eric Hanushek, the co-author of the OECD report. His response to the Australian political banter reminds us of the real issue at stake:

“There is no other governmental policy that offers anywhere near the same rate of return as investments in education quality.”

To put it in perspective, the Treasury estimated the economic gains from cutting corporate tax rates to 25% (as announced in the federal budget) at about 1% of GDP, reaching that level in about 20 years.

How strong is the link between skills and growth?

The economic benefits of education are well supported. The strongest evidence comes from rigorous studies at the individual level.

A range of studies, covered in a previous Grattan report, show that an individual is likely to earn an extra 5%-10% in lifetime income for every extra year of education. On average an individual with a bachelor degree is estimated to earn A$830,000 more than a high school graduate over his or her lifetime.

While there has been less research looking at achievement levels, the financial returns to better skills appear to be substantially higher than the returns from spending more years in education.

The biggest dividend to higher skills occurs in the US, but returns to higher skills are bigger in Australia than most countries studied.

A recent ABS study from Tasmania shows that students who get better results at school are more likely to complete Year 12, and more likely to find work once they leave school.

The same study shows that high achievers in Year 9 NAPLAN are twice as likely to be engaged in work or study in adulthood, compared to those in the bottom two NAPLAN bands.

Analysis in New Zealand shows that students who complete school have lower welfare and corrections costs. A good education helps young people stand on their own two feet.

Once we think about individuals, we can see why the macro-economic benefits unfold over time. Once individuals start work, they see the benefits immediately in salary or wages.

And the individual economic effects compound with time. Children of more educated individuals do better at school. These benefits will flow to their children, and so on.

Can we take this economic boost to the bank?

Unfortunately, none of these economic and social benefits will flow unless we can reverse Australia’s trend of slipping educational outcomes.

Both parties are proposing to spend more on education, yet there is no guarantee that either will lift outcomes substantially.

It depends on making the right decisions within these funding envelopes: to allocate funding where it is needed most; and to fund the practices that work, and stop funding those that do not. At present, neither party have put serious funding trade-offs on the table.

By contrast, many East Asian countries make serious trade-offs in spending. They invest heavily in teacher quality at the expense of other things.

In Shanghai, teachers teach larger, but fewer classes. As a result they have much more time for preparing for lessons, reviewing student progress and observing other teachers – practices known to improve teaching effectiveness.

An Australian Counil of Education Research report this week showed that Shanghai and South Korea deliver better education outcomes than Australia, at substantively less cost.

Improving education outcomes is hard, but possible. If we achieve this, the benefits will flow to the economy, as well as to individuals. But to improve outcomes, Australia will have to get much better at investing in evidence-based policies and stopping spending in the wrong places. This is the big challenge that faces the winner of the July election.