To get his historic school funding reforms over the line last week, Prime Minister Malcolm Turnbull was forced to commit to spending an extra $5 billion to win the votes of crossbench senators for the Gonski funding plan.
That's unfortunately how it works when governments have to negotiate their legislation through the Senate. It often ends up costing more.
Much as the extra spending upset some people, for example Liberal Democrat Senator David Leyenhelm refused to vote for it once the extra money was on the table. But pulling back on the extra $5 billion was not where the most fruitful savings could have been made to the cost of the plan.
The biggest opportunity was ignored by the government right from the start. And it would have saved more than $5 billion over the longer term.
The avoidable costs in Gonski are hidden in the indexation of school funding. It's way above current cost inflation, which is historically low.
For the first three years of Gonski, the federal government has committed to increasing the amount of money it gives to schools by 3.56 per cent a year, regardless of the level of cost inflation.
Counter the negative impact
Why has it done this? It was a commitment made in Turnbull's first budget in 2016. The election, in July that year, was looming and the government needed to do something to counter the negative public impact of Tony Abbott's budgets, which had tried to cut school spending.
In May this year, when Turnbull and his Education Minister Simon Birmingham dramatically announced they would implement the Gonski recommendations, they stayed with this high growth rate until 2020.
So each year until then, the target level of funding for individual schools will rise by 3.56 per cent a year. From 2021 onwards it will shift to a more realistic level linked to actual cost rises.
This will be a floating rate that is a composite of 75 per cent of the wage price index (WPI) and 25 per cent of the consumer price index (CPI). It has been chosen to reflect the fact that wages make up about about 75 per cent of school costs. (But even then, in a concession to Catholic schools, it will not fall below a floor of 3 per cent).
It means that, until 2021, the scheme assumes school costs will rise each year by an amount significantly above actual cost rises. For example, in the 12 months to the March quarter this year, the WPI rose 1.9 per cent and the CPI rose 2.1 per cent. It the floating index was applied to these numbers, it would have given a school funding increase of 1.95 per cent, instead of the legislated 3.56 per cent a year.
It we use the forecasts and projections for the CPI and WPI in the 2017 budget to estimate the likely actual rises in school costs for the next three years, we get an increase of 2.44 per cent in 2018, 2.75 per cent in 2019 and 2.81 per cent in 2020.
Paying too much
Over the full three years this yields a compounded increase of 8.21 per cent. This contrasts with the 11.06 per cent rise over those three years which is the result of the commitment to annual increases of 3.56 per cent.
It means that a gap of nearly 3 percentage points is expected to open up, over the next three years, between what the level of school funding should be (if indexation is intended to cover cost increases) and what it will be, given the generous commitment to increase the school funding target by 3.56 per cent a year.
Given that the government spends about $18 billion a year on schools, these three percentage points amount to an annual gap of about $500 million every year.
Admittedly these figures involve some estimation. For one thing, school funding does not rise by exactly 3.56 per cent a year.
It's actually the funding target that rises by this amount. Money to overfunded schools will be trending down towards this target and money to underfunded schools will be trending upwards to this target. But it's a reasonable proxy.
It means that, for all subsequent years, the federal government will be paying about $500 million more than it needs to.
States hurt too
It will also have an impact on the states and territories, which together pay more than $25 billion a year to keep their schools running. Because the last-minute amendments made to the Gonski legislation (the price of crossbench support in the Senate) require the states and territories to top up their school funding so that all public schools are within 95 per cent of the funding target, they will have put fork out more money each year as well.
This will cost them – in round figures – about $700 million a year more, in perpetuity.
Contrast this to the one-off $5 billion cost to the federal government of winning crossbench support. This will pay for speeding up the implementation of Gonski so that schools reach their target funding in six years (2023) instead of 10 years (2027). It is only paid once, and it also has benefits. If needs-based school funding is worth doing, then doing it sooner improves schools faster.
The fact that the cost of implementing Gonski is more than it should be (due to over generous indexation) is no secret. The Grattan Institute's school expert Peter Goss identified it last year and proposed that this fiscal fat should be used to bring in the scheme at minimum extra cost to the budget.
As it turned out, the government was willing to spend extra money and didn't need to trim the fat. Then, more recently, Goss recommended that this store of cash be used to accelerate the implementation of the plan, from 10 years to six years.
Again, the government found the money to do this and did not trim the fat. The upshot is that the flab is still there and Gonski is costing more than it needs to.
